Paychex Prevails in Revenue Sharing Dispute

Paychex Inc. may have influenced a 401(k) plan’s investment lineup, but did not make the ultimate decision about which fund options to offer participants, a federal judge has ruled.

With that decision, U.S. District Judge David G. Larimer of the U.S. District Court for the Western District of New York ruled that Paychex cannot be tagged with Employee Retirement Income Security Act (ERISA) violations for accepting revenue sharing money from mutual funds Paychex chose for its prototype plans.

Larimer explained that is because Paychex would not be considered an ERISA fiduciary since sponsors could still choose fund options from a Paychex-supplied menu and that Paychex’s administrative service agreement stated that Paychex was not a plan fiduciary.  The court granted a Paychex request to throw out the case.

In the decision, Larimer indicated that while Paychex could modify the list of available mutual funds, the administrative service agreement provided that before deleting or substituting a fund, Paychex was required to give sponsor clients at least 60 days notice of the proposed change. Sponsors could reject the proposed change or kill the agreement entirely.

Also supporting his reasoning, Larimer cited the widely followed 7th U.S. Circuit Court of Appeals decision in Hecker v. Deere & Co. (see “U.S. Supreme Court Turns Away Deere Fee Case“).

“Plaintiff’s allegation that Paychex controlled which mutual funds to make available to the Plan does not support its claim that Paychex is a fiduciary,” Larimer declared. “Ultimately, it remained up to plaintiff to decide which funds to invest in. Even if Paychex could be said to have ‘played a role’ in plaintiff’s decision (by presenting him with a set of options), in the end, that decision was plaintiff’s to make.”

Filing the suit was Steven R. Zang, a trustee of the Luxon & Zang PC 401(k) Profit Sharing Plan & Trust, who alleged that Paychex had breached its ERISA fiduciary duties and engaged in prohibited transactions by collecting the revenue sharing payments. Zang had requested class action status on behalf of all sponsors buying a Paychex prototype product.

Larimer’s ruling in Zang v. Paychex Inc., W.D.N.Y., No. 08-CV-6046L,  is here.