Prudential Beats Appeal Over Alleged 401(k) Kickback Scheme

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By Carmen Castro-Pagan

Prudential Retirement Insurance & Annuity Co. again defeated a lawsuit accusing it of operating a kickback scheme for the mutual funds offered through the 401(k) plans it services ( Rosen v. Prudential Ret. Ins. & Annuity Co. , 2017 BL 363551, 2d Cir., No. 17-0239, unpublished, affirming district court decision 10/11/17 ).

Prudential didn’t act as an Employee Retirement Income Security Act fiduciary in its role as the service provider and directed trustee of Ferguson Enterprises’ retirement plan, the U.S. Court of Appeals for the Second Circuit held Oct. 11. While Prudential may qualify as a fiduciary with respect to certain separate accounts it managed, the participant failed to properly plead a breach of fiduciary duty related to those accounts, the three-judge panel said.

The lawsuit, filed in 2015 and later amended, alleged that Prudential engaged in prohibited transactions and breached its fiduciary duties by receiving revenue-sharing payments from certain investment options. Prudential allegedly engaged in a “pay-to-play” scheme in which mutual funds provided kickbacks in the form of service fees and revenue-sharing payments to have access to Prudential’s customer base of 401(k) investors.

In their unpublished decision, the judges affirmed the district court ruling in favor of Prudential. The judges’ opinion follows other cases where courts have declined to impose fiduciary status on 401(k) service providers, including American United Life Insurance Co., John Hancock Life Insurance Co., and Principal Life Insurance Co. However, they were clear that certain additional requirements for fiduciary status adopted in some of those opinions didn’t bind the Second Circuit.

In their ruling, the judges recognized that Prudential was considered a fiduciary only to the extent that it exercised or possessed discretionary authority in relation to the plan.

As to the trust assets, Prudential didn’t exercise or possess any discretionary authority when it made or changed investments pursuant to Ferguson’s instructions, the judges wrote.

However, Prudential did possess some discretionary authority over investments made in the separate accounts, the court said. Prudential argued that it wasn’t acting as a fiduciary because it didn’t receive revenue-sharing payments from any separate account investments. However, the mere possession of the discretion to make substantive changes to investments within an account, even if such discretion is never exercised, can convert Prudential into a fiduciary with respect to those specific accounts, the court said.

Nonetheless, the judges ruled in favor of Prudential because the lawsuit didn’t allege any fiduciary breach with respect to the separate accounts.

The per curiam opinion was joined by Judges Dennis Jacobs, José A. Cabranes, and Richard C. Wesley.

Shepherd Finkelman Miller & Shah LLP and Duckworth Peters Lebowitz Olivier LLP represent the participant. Wilmer Cutler Pickering Hale & Dorr LLP and Pullman & Comley LLC represent Prudential.

To contact the reporter on this story: Carmen Castro-Pagan in Washington at

To contact the editor responsible for this story: Jo-el J. Meyer at

Copyright © 2017 The Bureau of National Affairs, Inc. All Rights Reserved.

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