In a case in which 401(k) plan participants allege Transamerica Life Insurance Company (TLIC) and its affiliates violated the Employee Retirement Income Security Act (ERISA) in the charging of fees and administration of certain investment accounts, the 9th U.S. Circuit Court of Appeals has remanded the case back to a district court, with instructions to dismiss it.
The complaint alleged that TLIC violated ERISA by charging fees on separate accounts in addition to those charged by the managers of the underlying investments; charging an “Investment Management Charge” on the separate accounts; receiving revenue sharing payments from managers of the underlying investments; “failing to invest in the lowest priced share class of the mutual funds that underlie the separate account investment options that invest in mutual funds”; and “negotiating the traditional lower fees that are associated with these investment options but retaining them rather than passing the savings along to Plaintiffs.”
The same group of plaintiffs previously filed a lawsuit against John Hancock with similar allegations. In that case, the 3rd U.S. Circuit Court of Appeals found that John Hancock was not acting as a fiduciary with regard to the allegations.
“Indeed, any other outcome would lead to absurd results. If service providers were fiduciaries while negotiating fees, they would have to promise that [their] fees were no higher than those of any competitor, rather than negotiate at arm’s length with an employer. And, an employer who knowingly agreed to a fee structure could nonetheless later sue to lower it, invoking the administrator’s fiduciary obligation,” the 9th Circuit wrote in its opinion, agreeing with the 3rd Circuit that “a service provider owes no fiduciary duty with respect to the negotiation of its fee compensation” because “[n]othing prevented the trustees from rejecting [the provider’s] product and selecting another service provider; the choice was theirs.”
The 9th Circuit said for the same reason, TLIC did not have a fiduciary duty to provide plan beneficiaries with the option to invest in the lowest priced share class of each of the mutual funds that underlie the separate investment options, and the plaintiffs’ contention that the revenue sharing payments violate TLIC’s fiduciary duty fails for the same reason—they were fully disclosed and agreed to by the fiduciary-employer before any fiduciary status attached.
Allegations after TLIC became a service provider
The plaintiffs also allege that TLIC engaged in prohibited self-dealing after becoming a plan administrator by receiving revenue sharing payments from investment managers and withdrawing its fees from the separate accounts. The appellate court said the first contention is easily dismissed. “TLIC is not a fiduciary with respect to the revenue sharing payments, because they were fully disclosed before the provider agreements were signed and do not come from plan assets,” it said, citing Leimkuehler v. American United Life Insurance Co.
The plaintiffs also argue that as a fiduciary, TLIC “dealt with the assets of the plan in [its] own interest” when withdrawing fees, and thus violated ERISA. The 9th Circuit noted that it has never directly confronted that issue, but the 3rd Circuit has, finding the provider is not exercising fiduciary duties under the same facts in Danza v. Fidelity Mgmt. Tr. Co. In that case, the appellate court found no statutory violation because the plan administrator acted as “a fiduciary only for purposes of administering the plan, not for purposes of negotiating or collecting its compensation.” Thus, it held that “[a] service provider cannot be held liable for merely accepting previously bargained-for fixed compensation that was not prohibited at the time of the bargain.”
Since the 9th Circuit reversed the district court’s order denying TLIC’s motion to dismiss and remanded it with instructions to the district court to dismiss the complaint, the appellate court said it is unnecessary to address its subsequent class certification orders, which it vacated.