From Stable to Shaky: What Bed Bath & Beyond’s Settlement Means for Retirement Plan Sponsors | Morris, Manning & Martin, LLP

In February, Bed Bath & Beyond, Inc.’s 401(k) Savings Plan Committee (the “Plan Committee”) agreed to pay $1,950,000 to participants in the Bed Bath & Beyond, Inc. 401(k) Savings Plan (the “Plan”) whose accounts were invested in the Plan’s stable value fund. The proposed settlement resolves a lawsuit claiming damages by Plan participants because of a reduction in their account balances as a result of reducing the value of the fund from book value to market value (i.e., a market value adjustment) as part of terminating the stable value fund when Bed Bath & Beyond, Inc.’s terminated the Plan in connection with its bankruptcy. The settlement was entered into before the court ruled on the defendant’s motion to dismiss. The case highlights for plan fiduciaries the importance of understanding the liquidity restrictions of stable value funds, and how they can impact participant benefits. 

Stable value funds are a popular choice for retirement plan investment lineups due to their low-risk profile, preservation of principal, and steady returns. These funds generally use fixed income investments to generate returns above money market rates while using wrap contracts to smooth out short-term fluctuations in the fund value and interest rates paid on the fund. The wrap contract adds some additional expense to the fund and usually imposes certain liquidity restrictions if the plan wants to terminate the stable value fund. These restrictions can include a market value adjustment (i.e., requiring the fund balances to be adjusted from the book value of assets to the market value of the assets if the book value is higher) or require a delay in liquidation when the termination of the fund is paid out (typically a 12 month delay and/or the liquidation payment made as installment payments over multiple years). 

In certain situations, like when market interest rates increase, the book value of assets may be less than the market value of the assets in the stable value fund. When the fund continues along, the wrap contract serves to smooth out these fluctuations over time. However, if the book value is less than market value, and the stable value fund will be terminated, the liquidity restrictions come into play. While most companies do not expect to end up in bankruptcy, it is important to note that market value adjustments and liquidity restrictions can be triggered by a number of common events, including changes in investment funds offered under the plan, merger of plans, as part of a recordkeeper change, or plan terminations. 

It is critical for fiduciaries to be aware of the liquidity restrictions in their plan’s stable value fund and proactively develop a strategy to protect the interests of plan participants and beneficiaries. Some actions fiduciaries can take include: 

• Understand the liquidity restrictions in the stable value fund, and their potential impact. Market value adjustments change with time and the interest rate environments. As part of their periodic review of the stable value fund, fiduciaries may want to know if the liquidity restrictions would apply if the fund were terminated, and how much of a market value adjustment might occur.          
• Consider the timing of future actions such as fund changes, recordkeeper RFPs, plan mergers, and plan terminations. It may be possible to coordinate the timing of actions to avoid or minimize disruption from liquidity restrictions of the stable value fund.