In a low interest environment, investors that do not want to take much risk but want a higher return than Money Market Funds (many participants in defined contribution (DC) plans) turn to what is known as Stable Value Funds (SVF). A recent 401(k) Litigation case against a DC record keeper who also manages the plan’s SVF highlights some of the issues surrounding these investments reviewed in a recent article published by Morningstar. Which is interesting because an allegation in another suit claimed that plan sponsors were liable because they offered Money Market Funds and not SVFs which had a much higher rate of return.
The suit by a participant in a plan record kept by the provider of the SVF alleged that the fees earned in the fund were unreasonable. Plan sponsors have a duty to ensure that fees are reasonable, a subject of numerous 401(k) litigation cases, but it’s questionable whether these fees pertain actual expense charged by investment manager. The tricky part about SVFs is that they are not registered like mutual funds with very little if any disclosure.
SVFs use enticing verbiage for conservative investors like “stable” or “guaranteed” – they offer investors a stated rate of return but little else is disclosed. In the recently filed lawsuit, the SVF manager was reported to have earned 4.6% return but only guaranteed investors 1.82%. Though the SVF provider takes some risk, they also get the benefit if they invest wisely, which seems only fair.
But the issue is about disclosure and, in the lawsuit, the fact that the SVF provider was also the record keeper earning additional fees. Did the spread of 2.78% between what investors earned and what the SVF yielded constitute unreasonable revenue to the record keeper who also managed the SVF? Should plan sponsors be held responsible?
With more people likely to be turned off by Money Market Funds’ returns but not willing to take risk, it’s important for plan sponsors and their plan advisor to know more about their SVF and what steps they can take to protect themselves and their employees especially in light of the rash of 401(k) lawsuits.
