Attorneys for retirement plan participants and plan sponsors may want to try a different tack to persuade federal appeals courts that companies providing administrative services to the plan should be treated as fiduciaries under the Employee Retirement Income Security Act.
The U.S. Court of Appeals for the Eighth Circuit, on Jan. 8, held that Principal Life Ins. Co. wasn’t an ERISA fiduciary for purposes of claims that it charged excessive fees to its 401(k) plan clients.
The appeals court rejected the Department of Labor’s argument that ERISA fiduciary liability should be imposed on 401(k) service providers, as did two other federal appeals courts before it (McCaffree Fin. Corp. v Principal Life Ins. Co., 8th Cir., 2016 BL 4162, No. 15-1007, 1/8/2016).
“These cases suggest that a service provider will not be deemed a fiduciary absent some showing that the service provider exercised discretion in a way that caused the harm complained of, e.g., providing separate accounts from a menu agreed to in the contract with the plan is insufficient to make the provider a fiduciary,” Robert Rachal, senior counsel at Proskauer Rose in New Orleans, told Bloomberg BNA. “Rather, the plaintiff will need to show something like that the service provider actually exercised its discretion post-contract to skew the selection to funds with more expensive fees.”
McCaffree Financial Corp. filed this ERISA lawsuit on behalf of its defined contribution plan, alleging that Principal Life Insurance Co. violated its ERISA-imposed duties of loyalty and prudence by structuring plan investments in separate accounts that directly corresponded with Principal mutual funds. This “wrapping” process imposed additional fees of 1.2 percent to 1.8 percent, despite providing “little or no benefit” over direct investments in the fund, the complaint alleged.
The U.S. District Court for the Southern District of Iowa dismissed the lawsuit and the Eighth Circuit affirmed.
The Eighth Circuit ruled that Principal’s creation of the menu of investment options for McCaffree’s 401(k) plan wasn’t indicative of being a fiduciary, because “Principal owed no duty to plan participants during its arms-length negotiations with McCaffree.”
McCaffree also was free to reject Principal’s terms and find a better deal elsewhere, it said.
Also, the court said, McCaffree didn’t establish a sufficient connection between the alleged charging of excessive fees and activities such as narrowing the list of investments, providing investment advice and failing to disclose certain fees.
There also wasn’t a sufficient connection between the allegedly excessive fees Principal charged and the allegation that Principal retained authority to adjust its fees, the court said.
The Eighth Circuit is the third appeals court since 2013, along with the Seventh and Third circuits, to reject DOL arguments that plan service providers should qualify as plan fiduciaries under ERISA.
In the Seventh Circuit case, the appeals court said the service provider’s ability to delete or substitute the funds available to participants was insufficient to impose fiduciary status on the service provider (Leimkuehler v. Am. United Life Ins. Co., 713 F.3d 905, 56 EBC 2407 (7th Cir. 2013)).
In the Third Circuit case, the court said that John Hancock's practice of creating and managing a “Big Menu” of plan investment options that trustees could choose from didn't give rise to fiduciary status under ERISA (Santomenno v. John Hancock Life Ins. Co., 768 F.3d 284, 58 EBC 2845 (3d Cir. 2014)).
Participants continue to press their arguments to hold service providers accountable under ERISA for allegedly charging excessive fees. An ERISA lawsuit filed by a plan participant on Jan. 14 in the U.S. District Court for the District Court of Colorado alleges that Great-West Life & Annuity Insurance Co.’s retirement plan business—branded Empower Retirement—charged excessive mutual fund fees to 401(k) plan investors (see related story, Great-West, Empower Targeted in Latest 401(k) Fee Suit).
For more information see related story, 8th Cir. Win for Principal Life Is Loss for DOL.
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