On November 25th, the U.S. Supreme Court denied a retirement plan participant’s petition to review a case in which the 10th U.S. Circuit Court of Appeals found that Great-West, as a non-fiduciary party in interest, was not liable for breaches alleged regarding its group annuity contract offered to retirement plans.
In the case, the plaintiff alleged that Great-West engaged in self-dealing transactions prohibited under the Employee Retirement Income Security Act (ERISA) Section 406(b), and caused the plaintiff’s retirement plan to engage in prohibited transactions with a party in interest in violation of ERISA Section 406(a). According to his complaint, Great-West had breached its general duty of loyalty under ERISA Section 404 by setting the credited rate of its Key Guaranteed Portfolio Fund for its own benefit rather than for the plans’ and participants’ benefit; setting the credited rate artificially low and retaining the difference as profit; and charging excessive fees.
Previously, the 10th Circuit held that Great-West’s contractual power to choose the credited rate did not render it a fiduciary under ERISA because participants could “veto” the chosen rate by withdrawing their money from the fund in question. As to Great-West’s ability to set its own compensation, the 10th Circuit held that Great-West did not have control over its compensation and thus was not a fiduciary because the ultimate amount it earned depended on participants’ electing to keep their money in the investment fund each quarter.
In his petition to the Supreme Court, the plaintiff said Great-West’s conduct violates ERISA’s clear rules barring parties in interest from using plan assets (i.e., the fund contract) to benefit themselves. He pointed out that the U.S. Supreme court previously held in Harris Trust & Sav. Bank v. Salomon Smith Barney that where a party in interest violates those rules, plan participants can force them to disgorge their ill-gotten gains. Multiple courts of appeals have held the same.
The plaintiff said the 10th Circuit “flouted that rule, holding that disgorgement was unavailable because the plan asset at issue was the fund contract—not specific property over which petitioner could himself assert title.”
According to the petition, the sole question before the lower courts was whether equitable relief was available in the form of disgorgement of Great-West’s unreasonable profits derived from its contracts with ERISA plans. The plaintiff argued that by answering “no,” the courts erroneously distinguished plan contracts from any other type of plan asset, the use of which could support disgorgement.
The plaintiff also argued that the appellate decision makes no sense, as most prohibited transactions occur via contract.