Court Finds John Hancock Not a Fiduciary in Fee Case

John Hancock has ultimately been found not to be a fiduciary in a case alleging it charged excessive fees for investments offered in two Employee Retirement Income Security Act (ERISA) retirement plans.

The 3rd U.S. Circuit Court of Appeals agreed with a federal district court (see “John Hancock Cleared of Wrongdoing in Excessive Fee Case”) that decisions in previous cases should apply to the argument that John Hancock was acting as a fiduciary “when taking the action subject to complaint.” In Hecker v. Deere, for example, the 7th U.S. Circuit Court of Appeals decided a service provider owes no fiduciary duty to a plan with respect to the terms of its service agreement if the plan trustee exercised final authority in deciding whether to accept or reject those terms. As in the current case, Santomenno v. John Hancock Life Insurance Company, the participants in the Deere case alleged their plan provider had maintained discretion in selecting the funds available for selection on the plan’s fund menu. The court noted that it was ultimately the responsibility of the plan sponsor to decide which options to offer plan participants, so the plan provider lacked the discretion necessary to confer upon it a fiduciary responsibility under ERISA.

Another case, Renfro v. Unisys, had many similarities to the Santomenno case. In Renfro, plan participants sued both the plan sponsor and the service provider, alleging both parties had breached a fiduciary duty by selecting for plan investment options that carried excessive fees. Just as John Hancock argues in the present case, Fidelity disclaimed any role in making the final decision on what investment options to offer plan participants. Also, as in Santomenno, the sponsor in Renfro was free to include in its plan funds not offered by Fidelity. In Renfro, the 3rd Circuit concluded that, because Fidelity had no contractual authority to control the mix and range of investment options, to veto the sponsor’s selections, or to prevent the sponsor from offering competing investment options, it lacked the discretionary authority necessary to create a fiduciary responsibility as to these activities. In addition, it found a service provider “owes no fiduciary duty with respect to the negotiation of its fee compensation.”

In an amicus brief to the appellate court, Secretary of Labor Thomas Perez argued the Santomenno case differs from Renfro because John Hancock retains the discretion to substitute and delete funds from its menu, and thereby from the plans’ and participants’ menus, without approval from the employers or participants. “John Hancock’s discretion over ongoing fund selection–giving it, not the employer, the ‘final say’ over plan investment options—is much greater than Fidelity’s was in Renfro. Thus, this Court’s conclusion in Renfro that Fidelity was not acting as a fiduciary in the circumstances of that case does not warrant a similar conclusion under the facts alleged here,” the Secretary’s brief says.

The 3rd Circuit cited the case of Leimkuehler v. American United Life Insurance Co. in which the 7th Circuit rejected this precise argument describing it as an “unworkable” “‘non-exercise’ theory of exercise” that “conflicts with a common-sense understanding of the meaning of ‘exercise,’ is unsupported by precedent, and would expand fiduciary responsibilities under [ERISA] to entities that took no action at all with respect to a plan.” Moreover, the 3rd Circuit added, “whether John Hancock could substitute investment options on the menu of choices from which the plan sponsor could select investments for the plan is not relevant to the injury that participants allege—charging excessive fees.”

The appellate court said in its opinion that fund selections and expense ratios are “product design” features of the type that Leimkuehler concluded do not give rise to a fiduciary duty. In Leimkuehler, the 7th Circuit also noted that the expense ratio for each fund AUL offered was fully disclosed, and the plan sponsor “was free to seek a better deal with a different 401(k) service provider if he felt that AUL’s investment options were too expensive.”

The 3rd Circuit concluded that, even if the retirement plan sponsors in the current case were incentivized to select certain funds by John Hancock’s promise of indemnification in a fiduciary warranty it offered, the trustees still exercised final authority over what funds would be included in the plans (and, by extension, what the accompanying expense ratios would be). “Nothing prevented the trustees from rejecting John Hancock’s product and selecting another service provider; the choice was theirs.”

The 3rd Circuit also said it did not see how monitoring the performance of the funds that it offers and relaying that information to the trustees, who retain ultimate authority for selecting the funds to be included in the plan, gives John Hancock discretionary control over anything, much less management of the plans.

Finally, the participants in Santomenno argue that John Hancock is an ERISA fiduciary because it has “render[ed] investment advice [to the Plans] for a fee or other compensation.” The appellate court noted first that “this alleged basis of fiduciary responsibility bears no nexus to the wrongdoing alleged in the complaint: Participants allege the charging of excessive fees, not the rendering of faulty investment advice.” Secondly, the appellate court said that under Department of Labor (DOL) regulations, in order for a fiduciary relationship to arise, John Hancock must have rendered investment advice to the plans “pursuant to a mutual agreement, arrangement or understanding.” According to the appellate court, far from showing mutual assent to an advisory relationship, in the contracts between the plans and John Hancock, John Hancock expressly disclaimed taking on any fiduciary relationship.

The 3rd Circuit’s opinion in Santomenno v. John Hancock Life Insurance Company is here.