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By Jacklyn Wille
Jan. 8 — The Labor Department is now 0-3 in its attempt to persuade the federal appeals courts to impose ERISA fiduciary liability on 401(k) service providers.
On Jan. 8, the U.S. Court of Appeals for the Eighth Circuit ruled that Principal Life Insurance Co. wasn't an Employee Retirement Income Security Act fiduciary for purposes of claims that it charged excessive fees to its 401(k) plan clients—the DOL, in an amicus brief, had argued that Principal should be treated as a fiduciary (McCaffree Fin. Corp. v. Principal Life Ins. Co., 2016 BL 4162, 8th Cir., No. 15-1007, 1/8/16).
The court's decision in favor of Principal follows the recent judicial trend of dismissing excessive fee claims against 401(k) service providers after finding that the providers don't qualify as fiduciaries under ERISA. The DOL has argued against this trend forcefully—and unsuccessfully—in the appellate courts, filing an amicus brief in the instant case and in recent lawsuits against American United Life Insurance Co. and John Hancock Life Insurance Co.
In 2013, the U.S. Court of Appeals for the Seventh Circuit rejected a profit-sharing plan's attempt to hold American United liable as an ERISA fiduciary for charging allegedly excessive mutual fund fees (Leimkuehler v. Am. United Life Ins. Co., 713 F.3d 905, 56 EBC 2407 (7th Cir. 2013)).
The U.S. Court of Appeals for the Third Circuit reached a similar conclusion in a lawsuit against John Hancock in 2014 (Santomenno v. John Hancock Life Ins. Co., 768 F.3d 284, 58 EBC 2845 (3d Cir. 2014)).
In declining to treat these 401(k) service providers as ERISA fiduciaries, all three courts have articulated the same standard: To hold a service provider liable for fiduciary breach, the activities giving rise to fiduciary status must bear some connection to the activities giving rise to the breach.
In attempting to hold Principal liable for the fees it charged McCaffree Financial Corp.'s 401(k) plan, McCaffree advanced a number of arguments as to why the financial services company should be treated as an ERISA fiduciary.
The Eighth Circuit found two major problems with McCaffree's arguments.
First, the court was unmoved by the fact that Principal created the menu of investment options from which the plan's investments were ultimately selected. According to the Eighth Circuit, Principal “owed no duty to plan participants during its arms-length negotiations with McCaffree,” because McCaffree always remained free to reject Principal's terms and find a better deal elsewhere.
Second, the Eighth Circuit said that McCaffree failed to establish a sufficient connection between the activities that supposedly made Principal a fiduciary—narrowing the list of investments, providing investment advice and failing to fully disclose certain fees—and the activities that McCaffree challenged in its lawsuit—namely, charging excessive fees.
Significantly, the Eighth Circuit also found no sufficient connection between the allegedly excessive fees Principal charged and the allegation that Principal retained authority to adjust its fees. As the court put it, “McCaffree does not allege that Principal exercised this authority or that any such exercise resulted in the allegedly excessive fees.”
Finding that McCaffree failed to establish Principal's status as an ERISA fiduciary, the Eighth Circuit concluded that the company couldn't maintain its lawsuit challenging the 401(k) plan fees in question.
The court's opinion was written by Judge Raymond W. Gruender and joined by Chief Judge William J. Riley and Senior Judge Kermit E. Bye. It affirms a 2014 ruling of the U.S. District Court for the Southern District of Iowa.
McCaffree was represented by John F. Edgar, John M. Edgar, Michael D. Pospisil and Alexander T. Ricke of Edgar Law Firm, Kansas City, Mo.; Joseph R. Gunderson of Gunderson & Sharp, Des Moines, Iowa; and Jason H. Kim, Michael C. McKay, Todd M. Schneider, Patrick J. Van Zanen and Garrett W. Wotkyns of Schneider & Wallace, Emeryville, Calif., San Francisco and Scottsdale, Ariz.
Principal was represented by Joel S. Feldman, Robert N. Hochman and Eric S. Mattson of Sidley & Austin, Chicago, and Angel A. West of Nyemaster & Goode, Des Moines, Iowa.
To contact the reporter on this story: Jacklyn Wille in Washington at firstname.lastname@example.org
To contact the editor responsible for this story: Jo-el J. Meyer at email@example.com
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