In a tale of two cities, one case against a 401k plan sponsor alleged to have breached their fiduciary duty for not removing a fund heavily invested in Valeant Pharmaceuticals was dismissed while another one was filed. A California Federal Court judge dismissed the case against Disney although plaintiffs expect to refile the complaints while a class action suit against FMC Corp. was filed in Pennsylvania.
At issue is the use of Sequoia Fund which lost 7.31% in 2105 compared to a market gain of 1.38% by the S&P 500 due largely to the fund’s holding of Valeant stock which fell precipitously. In dismissing the suit against Disney, the judge did not find any “special circumstances” which would have caused the plan sponsor to further investigate Sequoia and their underlying holdings. In fact, the judge noted that it would have been unreasonable and inappropriate for Disney’s investment committee to look beyond the market valuation of Sequoia’s underlying investments.
A similar suit against DST was withdrawn all of which did not stop the filing of a lawsuit against FMC for the same issues.
Meanwhile, another federal judge questioned whether the $8.8 million settlement paid by American Airlines for their use of a credit union fund rather than a stable value fund which would have yielded higher returns was too low. With $1 billion invested, losses are estimated at $88 million.
The dismissal of the Disney case may give 401k and 403b plan sponsors cold comfort with the filing of the lawsuit against FMC. Investment committees, especially those at smaller companies if they even have one, include many HR professionals who may not be investment experts. Understanding how mutual funds work may be a challenge never mind understanding the value of their underlying investments. And the questioning of the right type of capital preservation fund in a low interest environment in the American Airlines settlement may also pose issues as even many sophisticated plan advisors do not understand how stable value funds work.
Regardless, expect more lawsuits with many smaller companies willing to settle to avoid the cost and time to litigate.
