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Dezelan v. Voya Retirement Insurance and Annuity Co.

United States District Court, D. Connecticut

July 6, 2017

DARLENE DEZELAN, individually, on behalf of the Cedars-Sinai Medical Center 403b Retirement Plan, and on behalf of all similarly situated Plans, Plaintiff,
v.
VOYA RETIREMENT INSURANCE AND ANNUITY COMPANY, Defendant.

          RULING ON DEFENDANT'S MOTION TO DISMISS

          VICTOR A. BOLDEN UNITED STATES DISTRICT JUDGE.

         Ms. Darlene Dezelan (“Ms. Dezelan” or “Plaintiff”), brings this putative class action against Voya Retirement Insurance and Annuity Company (“Voya” or “Defendant”), concerning retirement funds that Voya managed on Ms. Dezelan's behalf. She brings claims under the Employee Retirement Income Security Act (“ERISA”), 29 U.S.C. §§ 1001 et seq., on behalf of the Cedars-Sinai Medical Center 403(b) Retirement Plan, in which she was a participant, as well as all other ERISA-covered employee pension benefit plans whose assets were invested in similar funds managed by Voya. Before the Court is Voya's motion to dismiss. For the reasons that follow, Voya's Motion is GRANTED. Ms. Dezelan's Complaint is dismissed without prejudice to refiling.

         I. Factual Allegations

         Voya, a legal reserve insurance company authorized under the insurance laws of New York, is based principally in Windsor, Connecticut. Compl. ¶ 8. Voya offers and sells Group Annuity Contracts to retirement plans, including the Cedars-Sinai Medical Center 403(b) Retirement Plan (the “Plan”). Id. at ¶ 9. Ms. Dezelan, a resident of Los Angeles, California, invests retirement assets under Voya's Group Annuity Contract (“Contract”) with the Cedars-Sinai Plan. Id. at ¶ 7.

         Ms. Dezelan alleges that Voya “offers and sells” stable value funds. Compl. ¶ 2. Stable value funds are “one of the most popular investment strategies for pension plans, ” because “unlike traditional fixed income or bond funds, stable-value funds are structured … so that the principal and income payments are steady instead of fluctuating.” Thomas P. Lemke & Gerald T. Lins, ERISA for Money Managers and Advisors § 2:143 (2016 Ed.) (“Lemke & Lins”) (noting that the “protection of principal and interest, even in volatile or troubled markets, is a key attraction of stable-value funds.”); Austin v. Union Bond & Trust Co., No. 3:14-CV-00706-ST, 2014 WL 7359058, at *3 (D. Or. Dec. 23, 2014) (“In contrast [to traditional bond funds], an SVF is designed to minimize the impact of market fluctuations.”). A key feature of the stable value fund an investor is that she can withdraw from the fund at any time and receive the book value of her investment, even if its market value would be lower. Id.

         The book value of an investment in a stable value fund is determined by the initial investment as well as “contractually specified … increases in value.” Austin, 2014 WL 7359058, at *3. A stable value fund contract sets forth a certain rate, usually called a “crediting rate, ” at which interest is applied to investments in the fund. Lemke & Lins § 2:143. This rate may be lower than the actual rate of return that the fund receives on the assets, so that the fund can “smooth[] portfolio gains and losses over time.” Id.

         A. Ms. Dezelan's Contract

         Ms. Dezelan's Plan invested in a Voya product called “Separate Account 896” (the “Separate Account”), an “individual separate account that invests in broad sectors, ” using a “strategy … to outperform the Barclays Capital U.S. Aggregate Bond Index by 50 basis points on a rolling three year basis.”[1] Contract, p. 19. Under the Contract, the Plan's participants can convert their accumulated contributions and interest into annuities. Id. at §§ 5.01; id. at § 1.05 (allowing for “(a) Participant-initiated withdrawals; (b) Participant-directed transfers of their account balances between Investment Options; (c) Participant loans; or (d) Annuity purchases”).

         Under the Contract, the Plan deposits funds to Voya, and Voya invests these funds consistent with certain agreed-upon “investment objectives.” Id. at §§ 2.01, 2.02; 2.11. When the assets in the Separate Account accumulate interest, Voya “credits” a certain portion of that interest to the Interest Accumulation Fund at the “Crediting Rate.” Id. at § 2.07. The Contract guarantees a “minimum … Crediting Rate, net of any applicable expense charges assessed, of 3.0%.” Id. at § 2.08. Between April 1, 2014 and June 30, 2014, Voya applied a Crediting Rate of 3% to the Separate Account. Id. at p. 33. Under the Contract, Voya also charged investors a fee of 0.75% of the Interest Accumulation Fund. Id. at p. 24.

         Under the Contract, “benefit withdrawals, ” id. § 2.16, including annuity purchases, may not “exceed the balance in the Interest Accumulation Fund.” Id. at § 2.21. Similarly, “Employer-Event Withdrawals, ” which are withdrawals or transfers “resulting from Employer-level event[s] not in the ordinary course of business, ” including “spin-offs, ” “sales, ” “mergers, ” or “layoffs, ” id. at § 1.14, are paid from “[t]he Separate Account, to the extent of available funds.” Id. at § 2.26; id. at § 1.14 (“Employer-Event Withdrawals … are withdrawals from the Interest Accumulation Fund”).

         If it discontinues its contract with Voya, the Plan can only receive the amount of money in the Interest Accumulation Fund. Contract, p. 25 (“Over the Book Value Settlement Phase, we will pay you the balance of the Interest Accumulation Fund.”). The Contract states that, at the time of discontinuance, Voya “will retain any amounts remaining under the Separate Account Balance, ” or the “fair market value of the Separate Account, ” following payment of the Interest Accumulation Fund. Id. at §§ 1.22; 3.06.

         In the Contract, Voya “acknowledge[s] that: “if the Plan is subject to [ERISA, Voya is] acting as a fiduciary, as defined in section 3(38) of ERISA, solely with respect to the management of Plan funds held in a Separate Account.” Contract, § 7.07. It adds that “in all other respects, in exercising our rights, we represent ourselves and not the Plan.” Id.

         B. The Crediting Rate

         The Contract establishes the formula for determining the Crediting Rate. The Contract provides several factors that are relevant to this formula. Contract, pp. 22-23.[2] These include the “IAF, ” or the “projected balance of the Interest Accumulation Fund.” See Contract § 1.16; § 1.13. It also considers the “MV, ” or the projected Separate Account Balance, which “reflect[s] the fair market value of the Separate Account.” Id. at § 1.22. Finally, it considers the “net effective yield available, on the date we determine the new Credited Rate, on assets similar to those in the Separate Account.” Id. at p. 23. Generally, Voya states that considers “projections … based on current balances or values available on the date [it] determine[s] the new Credit[ing] Rate, and reasonable assumptions as to cash flows, earnings, and other occurrences” during the Crediting Rate period.

         As Ms. Dezelan notes, the Contract gives Voya the ability to change the Crediting Rate formula, and the exhibit in the record only describes the one that it “currently use[s].” Contract § 2.08 (“The Credit[ing] Rate is determined by us. It reflects our assumptions. … The formula we currently use … is described in the attached … exhibit.”). Voya may change the Crediting Rate formula or the rate itself with 30 days' advance written notice to participants, but that the change will not apply if a participant gives a discontinuance notice before the change is effective. Id. at p. 23.

         C. General and Separate Account Stable Value Funds

         Ms. Dezelan refers to two types of stable value funds in her Complaint. “Separate account” stable value funds utilize “a separate account established by [the] bank or insurance company for the sole purpose of holding the invested assets.” Lemke & Lins at § 2:143 (“In addition to increased flexibility and transparency, the separate account also provides an additional level of comfort because the underlying assets are segregated from those of the bank or insurance company.”). In “general account” stable value funds, by contrast, “the underlying assets are held by the bank or insurance company, ” alongside the bank's other assets. Lemke & Lins § 2:143. In these, “the guarantee obligation is a general obligation of the issuer, backed by its financial strength.” Id.

         The Contract does not refer to Plan assets held in a general account stable value fund, but explains the Plan's separate account fund in more detail. It clarifies that the Separate Account is a “segregated asset account [that Voya] established under Connecticut law.” Contract § 1.21 (“Deposits to this contract are allocated to a Separate Account.”). Under the Contract, the assets in the Separate Account are “not chargeable with liabilities arising out of any of [Voya's] other business, ” but are owned by Voya. Id. at § 2.14. Indeed, the Contract specifically states that Voya “own[s] the investments held in a Separate Account” and is “not the trustee of such assets.” Id.

         D. Ms. Dezelan's Allegations

         Ms. Dezelan alleges that Voya earns undisclosed profits from the Plan and its participants by depressing the Crediting Rate, so that the value of the Interest Accumulation Fund, and the amount of money available to the Plan, is artificially low. She claims that Voya keeps the difference between the Crediting Rate and the Rate of Return, which she calls the “Spread.” With the Crediting Rate set artificially low, Voya can “collect[] hundreds of millions of dollars annually in undisclosed compensation from the retirement plans” by keeping the “Spread.” Compl. ¶ 3.

         Ms. Dezelan does not allege that she has withdrawn money from the Separate Account or receives annuities from Voya. Rather, her allegations concern the “accumulation phase” of her Plan's Contract. She alleges that Voya breached its fiduciary duties to the Plan during this period, reducing the amount of Plan funds that would eventually be available for her to withdraw. See Lau v. Metropolitan Life Ins. Co., 15-cv-09469 (PKC), 2016 WL 5957687 (S.D.N.Y. Aug. 22, 2016), *3 (explaining, when reviewing a similar investment product, that an ERISA plaintiff can challenge a contract that provides for guaranteed benefits “during its accumulation phase, ” even if an exception to ERISA would be applicable “once contractually guaranteed fixed payouts began.”) (citing John Hancock Mut. Life Ins. Co. v. Harris Trust & Sav. Bank, 510 U.S. 86, 89 (1993)).

         Ms. Dezelan emphasizes that Voya “has the sole and exclusive discretion to determine the Crediting Rate for a given Crediting Period, ” and alleges that it sets the Crediting Rate “well below the internal rate of return.” Compl. ¶ 2. Specifically, she references one of Voya's internal audits to allege that the company “earns 6.1% on assets [in the Separate Account] and makes and takes a Spread of as much as 3.2% on assets invested in the stable value funds.” Id. at ¶¶ 48-49; see also Id. at ¶ 51 (alleging, with regard to general account plans, that Voya “similarly directly sets and controls the spread … and therefore directly controls its own compensation”). At oral argument, Ms. Dezelan alleged that Voya made similar profits in 2009, 2010, 2011, and 2012, and that the total “Spread” for these years was over twenty million dollars.

         Ms. Dezelan also alleges that Voya does not disclose the “Spread” to plans and participants, who “have no way of knowing how much extra, undisclosed profit [Voya] makes on the investment of Plan assets.” Compl. at ¶¶ 3, 53. This alleged obfuscation works in concert with the “substantial restrictions and financial penalties on transfers” that Voya imposes on stable value fund plans, to “effectively prevent[] a Plan from terminating a stable value fund.” Id. at ¶ 21. In this way, “plan fiduciaries are effectively precluded from making determinations concerning the reasonableness of the Crediting Rate, ” or from replacing their fund with another stable value fund if they determine that Voya's Crediting Rate is unreasonable. Id. at ¶ 25.

         Ms. Dezelan also alleges that Voya “likely transfers funds” between the Separate Account and its general account. Compl. ¶¶ 30, 34. She argues that Voya “reserves to itself the right in its sole discretion to determine” whether Plan assets should be held in the [Separate Account] or in Voya's general account. Id. at ¶ 21. In exercising this discretion, Ms. Dezelan alleges, Voya “withhold[s] the reserves that are carved out from [Separate Account] assets, ” reducing the assets available for Plan participants. Id. at ¶ 33. It also “reserves to itself the right to transfer and in fact transfers funds between the [Separate Account] and [its general account]” at its sole discretion. Id. at ¶ 34. At oral argument, Ms. Dezelan clarified that she does not allege that the Contract permits these transfers, but contends that Voya makes them anyway.

         E. The Present Action

         Ms. Dezelan makes three claims against Voya. The essence of all three claims is that Voya unlawfully profited by setting the Crediting Rate for its stable value funds for its own benefit. See, e.g. Compl. ¶¶ 72, 87, 94 (describing Voya's “setting and resetting [of] the Crediting Rates applicable to the stable value funds, ” and “determining the level of its own compensation.”).

         First, Ms. Dezelan alleges that Voya violated Section 406(a)(1)(C) of ERISA, which provides that a fiduciary shall not cause a plan to engage in a transaction if it knows that the transaction constitutes direct or indirect furnishing of goods or services by a “party in interest to a plan.” Compl. ¶¶ 75-85 (citing 29 U.S.C. § 1106(a)(1)(C)). Second, she argues that Voya violated Section 406(b)(1) of the law, which prohibits a fiduciary from “deal[ing] with plan assets in his own interest or for his own account.” Id. at ¶¶ 86-87 (citing 29 U.S.C. § 1106(b)(1)). Finally, ...


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