John Hancock cannot demand that a pension plan trustee suing it in an excess fee case actually pay for any plan losses charged by the trustee as a result of a Hancock fiduciary breach, the court said. U.S. District Judge Nathaniel M. Groton of the U.S. District Court for the District of Massachusetts ruled that Hancock was not entitled to rely on the legal principle of indemnification and contribution in the suit filed against Hancock by 401(k) plan trustee John Charters.
Groton threw out Hancock’s counterclaim against Charters in which it argued that if John Hancock is found to have breached its fiduciary duties under the Employee Retirement Income Security Act (ERISA), Charters must agree to indemnify Hancock because Charters allegedly approved of the fees.
Under the indemnification and contribution principle, when one person is subject to liability because of another person’s action, the second person has to make good the loss, and contribution requires the loss to be distributed among several liable fiduciaries. In his ruling, Groton noted that federal appellate courts are divided on the issue of whether ERISA permits indemnification and contribution, but said Groton was siding with those courts that have found that courts should not imply statutory remedies, which are not allowed under ERISA.
“Here neither party disputes that ERISA does not explicitly provide for claims of contribution and indemnification among co-fiduciaries. Allowing fiduciaries who have breached their duty to resort to contribution and indemnification to recover from co-fiduciaries is not ‘of central concern’ to ERISA,” Groton asserted.
Revenue Sharing Complaint
Charters alleged in his lawsuit that John Hancock received revenue sharing payments greater than the amount by which it reduced the administrative maintenance fee or in excess of the entire authorized administrative maintenance. Hancock argued it was not a fiduciary because it did not exercise authority or control over the management or disposition of the plan’s assets, as such authority was given to Charters.
However in an earlier ruling last year, Groton found that Hancock may have acted as a fiduciary of the Section 401(k) plan through its ability to substitute or delete mutual funds from the menu of investments it provided for the plan (see Law Firm Gets to Proceed with Fee Lawsuit Against Hancock).
Groton also turned away Hancock’s argument that it was not a plan fiduciary because it had no discretionary control over the amount of “administrative maintenance charge” it assessed against the plan. According to the court, John Hancock qualified as an ERISA fiduciary because its service agreement with Charters’s plan gave John Hancock the sole authority to set the administrative maintenance charge.
According to a case history in the ruling, Charters purchased a variable annuity contract from John Hancock in April 2005. Under the contract, John Hancock held and managed assets of the plan in an account maintained by John Hancock, which was segregated from the company’s general funds.
John Hancock offered the mutual funds through sub-accounts that were maintained by the company as bookkeeping records to account for investment in the mutual funds, the court said.
According to Groton, John Hancock charged a fixed participant fee and an asset charge based on the amount of assets held in the separate account. The charges were intended to compensate Hancock for performing recordkeeping services. Under the contract, John Hancock also charged an annual investment charge for investments in each sub-account.
The case is Charters v. John Hancock Life Insurance Co., D. Mass., No. 07-11371-NMG, 9/30/08.