MassMutual Is Functional Fiduciary; Ability To Remove Funds Doesn't Confer Status


Mass Mutual Life Insurance Co. is a functional fiduciary of two Section 401(k) plans because of its ability to set its own compensation as a service provider, but not because of its authority to substitute funds from the plans' investment lineups, a federal court concluded (Golden Star, Inc. v. Mass Mut. Life Ins. Co.,2014 BL 139890, D. Mass., No. 3:11-cv-30235-PBS, 5/20/14).         

Despite finding MassMutual to be a fiduciary, Judge Patti B. Saris of the U.S. District Court for the District of Massachusetts clarified that this fiduciary status wasn't predicated on the company's ability to remove funds from the plans' investment lineups. That is because the record contained no evidence that the insurer ever exercised such authority, Saris explained in her May 20 opinion.         

In so ruling, Saris emphasized the distinction between the fiduciary definitions provided by Employee Retirement Income Security Act Sections 3(21)(A)(i), which encompasses parties who exercise discretion over plan management or assets, and 3(21)(A)(iii), which includes parties that have discretionary authority over plan administration. According to Saris, MassMutual's ability to substitute funds—without evidence that such power was exercised—didn't give rise to fiduciary status under either subsection.         

This distinction recently attracted the attention of the Department of Labor, which filed an amicus brief with the U.S. Court of Appeals for the Third Circuit weighing in on the two sections in another case involving revenue sharing.         

Hot Fiduciary Topic          

The distinction between Sections 3(21)(A)(i) and 3(21)(A)(iii) has been a hot topic in recent months.         

In Leimkuehler v. Am. United Life Ins. Co., 2013 BL 102079, (7th Cir. 2012), the U.S. Court of Appeals for the Seventh Circuit rejected the idea that American United Life Insurance Co. acted as a fiduciary under   ERISA Section 3(21)(A)(i) through its selection of mutual fund share classes for its investment lineup.         

This ruling prompted the DOL to file an amicus brief in an unrelated case.         

In the brief, the DOL asked the Third Circuit to reverse a district court decision in favor of John Hancock Life Insurance Co. and find that the company acted as a fiduciary in managing a lineup of Section 401(k) plan investment options (Santomenno v. John Hancock Life Ins. Co., 3d Cir., No. 13-3467, brief filed 1/21/14).         

In an apparent attempt to distinguish Leimkuehler, which was largely decided under ERISA Section 3(21)(A)(i), the DOL argued that John Hancock also qualified as an ERISA fiduciary under Section 3(21)(A)(iii), because it had discretionary authority over plan administration.         

Earlier this year, the U.S. Supreme Court declined to review the Leimkuehler ruling.         

Effect of Instant Ruling          

The court's ruling in the instant case directly touched on the issue left open by Leimkuehler and taken up by the DOL amicus brief—namely, whether the power to substitute funds in an investment lineup causes a record keeper to be an ERISA Section 3(21)(A)(iii) fiduciary for purposes of a challenge to its receipt of revenue-sharing payments.         

Appearing to disagree with the DOL, the court answered that question in the negative. However, the court emphasized that its conclusion was based partly on the fact that MassMutual never exercised this discretion. In contrast, the DOL argued in its Santomenno brief that John Hancock “could, and on occasion did, unilaterally substitute funds.”        

Despite finding that this unexercised power didn't render MassMutual an ERISA fiduciary, this conclusion didn't disturb the court's ultimate holding that MassMutual became a functional ERISA fiduciary under both Sections 3(21)(A)(i) and 3(21)(A)(iii) through its power to determine its own compensation.

Excerpted from a story that ran in Pension & Benefits Daily (5/21/2014).