Pension & Benefits News Voya withstands charge that it improperly retained “spread” resulting from manipulation of credited interest rates in stable value funds
Friday, November 16, 2018

Voya withstands charge that it improperly retained “spread” resulting from manipulation of credited interest rates in stable value funds

By Pension and Benefits Editorial Staff

Allegations that a legal reserve insurance company breached it duties under ERISA by manipulating credited interest rates under stable value funds failed to state a plausible claim for relief, according to a federal trial court in Connecticut. The complaint did not charge that the company kept the profits from the alleged manipulation or improperly retained any plan assets.

Guaranteed annuity contract stable value funds. Voya Retirement Insurance and Annuity Company offered a guaranteed annuity contract stable value fund to participants in a 403(b) plan maintained by Cedars-Sinai Medical Center. The stable value fund in which the plan participants was a guaranteed separate account known as “Separate Account 896.”

Note: A separate account stable value fund uses a separate account established by a bank of insurance company for the sole purpose of holding the invested assets.

The Voya separate account is a segregated asset account. Under the governing contract, the assets in the separate account are not charged with liabilities arising out of any of Voya's other businesses, but are owned by Voya. Thus, Voya owns the assets held in the separate account, and is not a trustee of the assets.

Under the contract, the plan deposits funds to Voya, which are then allocated to the separate account, consistent with the investment objections Voya has set for the separate account. When the assets in the separate account accumulate interest, Voya credits a certain portion of that interest to an “Interest Accumulation Fund” at a “credited rate.” The credited rate is determined by Voya (pursuant to a formula specified in the contract), but the contract guarantees that the minimum guaranteed credited rates (net of any applicable expense charges) will not be below 3 percent.

Voya's financial obligations to plan participants are measured by the Interest Accumulation Fund. Under the contract, participants can convert accumulated contributions into annuities. However, the contract states that benefit withdrawals, including annuity purchases, may not exceed the balance in the Interest Accumulation Fund. In addition, in the event Cedars-Sinai terminates the contract with Voya, the plan can receive only the amount of money in the Interest Accumulation Fund. Voya would retain any amount remaining under the separate account balance following payment of the Interest Accumulation Fund.

A plan participant brought suit under ERISA, alleging that Voya profits from the separate account by depressing the credited rate below the interest rate of return, so that the value of the Interest Accumulation Fund and, therefore, the money available to plan participants is artificially low. Specifically, the participant charged that Voya collects a “substantial profit” for the difference between the guaranteed credited rate and the interest rate of return (i.e., “Spread"). By lowering the credited rate below the guaranteed rate of 3 percent, the participant averred, Voya is able to collect hundreds of millions of dollar annually for undisclosed compensation from plans and plan participants.

In support of the claim, the participant referenced the plan auditor's findings from the period 2009-2014, indicating that the separate account earned an additional $14,613,885 in unauthorized Spread compensation. According to the participant, the magnitude of the Spread indicated that Voya must have set a low credited rate.

Further, the participant alleged, Voya did not disclose the amount of the Spread that it earns or reasonably expects to receive from its plan clients and participants. According to the participant, the non-disclosure effectively prevents a plan from terminating a separate account.

The original action, filed in July 2016, was dismissed without prejudice in July 2017. In August, 2017, the participant filed an amended complaint, alleging fiduciary breach under ERISA Sec. 404 and prohibited transactions under ERISA Sec. 406. The participant further sought to represent a class that would include all participants in all ERISA plans with assets invested in Voya group annuity contract stable value funds within the six years prior to, on or after July 26, 2010.

Voya moved to dismiss the amended complaint, maintaining that the participant failed to plausibly allege that Voya earned excess compensation from the alleged Spread. Specifically, Voya argued that the participant did not plausibly allege that company took Spread from the separate account assets and used it for its own interests.

The participant countered that the amended complaint sufficiently alleged that Voya depressed the credited rate, failed to amortize the Spread, and kept the Spread as excessive compensation. The trial court dismissed the case, with prejudice.

Fiduciary breach in manipulation of credited rate. In the amended complaint, the participant charged that Voya manipulated the Credited Rate for its own advantage, earning over $14 million in undisclosed Spread compensation by depressing the credited rate of the separate account. Further, the participant maintained that Voya kept the Spread by artificially lowering the credited rate rather than amortizing the Spread through the credited rate as required by the contract. According to the participant, the gains and losses should have been amortized and the profits returned to plan participants through the credited rate within 5.75 years. In order to support the claim, the participant alleged that Voya holds the Spread's profits with it other general account assets, as allowed under Connecticut law, and used for general account purposes.

In finding that the participant did not meet the applicable threshold, the court first explained that the contract does not allow Voya to keep separate account assets, or take the Spread, before the contract's termination. The amended complaint did not redress the pleading obstacle, the court reasoned because it did not plausibly allege that Voya keeps the Spread that it earns from the plan's separate account in its own account. The financial statements produced by the plan's auditor may have established the existence of the Spread and Voya's unreasonable and undisclosed compensation. However, the court stressed, the evidence did not demonstrate that Voya kept the Spread, but only suggested the “sheer possibility” of misconduct.

Amortization of separate account gains and losses. In addition, the court found that the contract did not require that gains and losses in the Separate Account be amortized within six years. Accordingly, the participant could not plausibly suggest that Voya breached its fiduciary duty by not amortizing the separate account gains and losses.

Evidence did not indicate Voya retained plan assets for own benefit. The participants prohibited transaction claims under ERISA Sec. 406(a)(1)(C) and 406(b)(1) were also dismissed. The complaint, the court again stressed, did not indicate that Voya kept the Spread or abused its discretion by retaining any plan assets.

SOURCE: Dezelan v. Voya Retirement Insurance and Annuity Company (DC CT).

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