Key Takeaway: The defendant successfully prevailed at trial against allegations that it breached its duties by setting the rate of return of its stable value product too low, where the court found that stable value product investors’ interests extend beyond just increased rates of return and include “the safety and security of a soundly backed investment.”
On April 8, 2021, following a six-day bench trial, the Southern District of Iowa issued a full defense verdict in favor of Principal Life Insurance Company in a class action brought on behalf of individuals who had invested in the Principal Fixed Income Option (PFIO), a stable value product managed by Principal. The plaintiff alleged that Principal set the PFIO’s rate of return in order to “achieve . . . profit objectives rather than to pay maximum returns,” and therefore breached its duty of loyalty under ERISA to the PFIO’s investors and committed prohibited transactions. The plaintiff is appealing the ruling.
The court rejected the plaintiff’s assertion that stable value product managers must set the rate of return for the product at the maximum rate possible, ruling that this takes too narrow a view of the interests of stable value investors. Instead, because investors are attracted to stable value products in part because of the low risk of such investments, the interests of investors in stable value products extend to minimizing the risk of the investment. Setting the rate of return too high, the court explained, could undermine this interest by threatening the long-term sustainability of the investment’s guarantees. The court held that Principal therefore acted loyally by setting the PFIO’s rate of return based on actuarially-sound assumptions that created an economically viable investment product with a guaranteed rate of return. Moreover, because the court found that the PFIO investors’ and Principal’s interests to minimize the PFIO’s risk aligned, it held that their interests did not conflict and therefore rejected the plaintiff’s argument that Principal should have mitigated any conflict of interest by outsourcing the process to set the PFIO’s interest rate to an independent third party. Finally, the court rejected the plaintiff’s claim that Principal dealt with plan assets “in [its] own interest” when setting the PFIO’s interest rate and thereby committed a prohibited transaction, again citing the alignment of interests between Principal and PFIO investors.
This case is Rozo v. Principal Life Insurance Co., No. 14-00463, in the Southern District of Iowa. The decision is available here.