NEW YORK The U.S. Department of Labor is looking into whether JPMorgan Chase & Co violated its fiduciary duty under the Employee Retirement Income Security Act in connection with one of its stable value funds.
Stable value funds are used in 80 percent of 401(k) self-directed retirement plans and are meant to be the most conservative choice for employees - liquid and backed by insurance.
But, the $1.8 billion JPMorgan Stable Asset Income Fund has had as much as 13 percent of its assets invested in private mortgage debt underwritten and rated by the bank itself. It has reduced that to just under 4 percent, as of June 30, according to a spokesperson.
Many employers with 401(k) plans were unaware of the private mortgage component of the fund until after the 2008 market crash, according to retirement plan consultants who worked with companies that held the portfolios.
Over the past several weeks, the Labor Department has been examining whether the New York-based bank breached its fiduciary responsibilities under ERISA, according to two people with direct knowledge of the situation who declined to be named because of the sensitivity around discussing potential investigations.
One source, who had been contacted by the Labor Department about the JPMorgan fund, said he did not know if the Labor Department had begun a formal investigation or was still in the exploratory process.
"If it's not a formal investigation, it's pretty damn close," the person said.
Under ERISA, fiduciaries are responsible for acting in the sole interest of plan participants. Basic questions the Labor Department may be trying to answer, according to the sources: whether the fund has risky investments, like the private mortgage debt, that were not appropriate for a plain-vanilla value fund and whether JPMorgan has done enough to disclose potential risks.
If the Labor Department is conducting a formal investigation and finds that JPMorgan did not act in the best interest of plan participants, the agency could sue the firm on behalf of the plans, said Bradford Campbell, counsel at Drinker Biddle LLP, and a former assistant secretary of labor for employee benefits and former head of the Employee Benefits Security Administration.
A Labor Department spokesman declined to confirm or deny an investigation. A JPMorgan spokeswoman declined to say whether the bank had received a notice from the Labor Department about a formal investigation.
In April, an employee of pharmaceutical firm Hospira Inc, who was invested in the company's 401(k) plan - which included JPMorgan's stable value fund - filed a lawsuit alleging the investment in private mortgage debt violated ERISA.
That lawsuit is still making its way through the legal process and it will be several months still before the judge determines if it should receive class action status, said Joseph Peiffer, an attorney with Fishman Haygood Phelps Walmsley Willis & Swanson LLP, who had heard that the Labor Department was looking into the issue, but had not yet spoken to agency officials.
"The suit is alleging potential significant violation in a product that is in thousands of plans so it is certainly one (the Labor Department) would pay attention to," because of the size of the fund, said Campbell, who did not know about the case.
The agency may be examining whether JPMorgan did enough to clearly disclose the allocation to private mortgage debt to 401(k) plan clients, he said.
In an April interview with Reuters, Peter Chappelear, head of JPMorgan Asset Management's stable value business, said JPMorgan marketing materials mentioned the private mortgage debt on at least three pages.
"Nothing was buried anywhere," he said in that interview.
(Reporting By Jessica Toonkel; Editing by Bernard Orr)