A federal judge has dismissed a lawsuit claiming Voya Financial and Voya Retirement Advisors (VRA) engaged in prohibited transactions in violation of the Employee Retirement Income Security Act (ERISA) through a service arrangement with Financial Engines.
Plaintiff Lisa Patrico filed the lawsuit on behalf of all participants and beneficiaries of the Nestle 401(k) Savings Plan and all other similarly situated individual account plans. According to the complaint, the plan offers participants access to investment advice through VRA.
Pursuant to the Nestle-VRA Agreement, VRA offers two investment advice programs—a self-service, online program called “Personal Online Advisor” and a managed account service called “Professional Account Manager.” Nestle pays VRA fees in association with the services. However, Financial Engines actually provides the advice under an agreement with VRA. Patrico alleges that VRA “provides no material services in connection with the advice program, and the only reason for structuring the advice service as being provided by [VRA] with sub advisory services by Financial Engines is to allow [VRA] to collect a fee to which it is not entitled.” She claims that, by structuring the investment advice program this way, VRA and the other Defendants breached their fiduciary duties and engaged in prohibited transactions in violation of ERISA.
U.S. District Judge Lorna G. Schofield of the U.S. District Court for the Southern District of New York, dismissed the breach of fiduciary duty claim under ERISA Section 404 because the complaint fails to allege facts showing the defendants were ERISA fiduciaries with respect to their fees. She noted in her decision that the 2nd U.S. Circuit Court of Appeals has held that when a service provider that has no relationship to an ERISA plan is negotiating a contract with that plan, the service provider “is not an ERISA fiduciary with respect to the terms of the agreement for [its] compensation.” According to Schofield, the rationale for this rule is that a service provider in such a situation “has no authority over or responsibility to the plan and presumably is unable to exercise any control over the trustees’ decision whether or not, and on what terms, to enter into an agreement.” She noted that Nestle was free to select a different investment advice service provider or none at all.
Schofield found the complaint also fails adequately to allege that defendants became ERISA fiduciaries with respect to their compensation after the Nestle-VRA Agreement was executed. Under the Nestle-VRA Agreement, VRA’s compensation for the program is a function of two factors—the number of participants with a balance in the plan and the total plan assets of participants in the program. “Neither VRA nor any other Defendant can control those factors; they depend solely on the Plan participants’ investment decisions,” she wrote in her decision.
Schofield also rejected the argument that the defendants controlled their compensation by controlling the proportion of the fee that went to Financial Engines, and in that regard were ERISA fiduciaries, saying Nestle exercised final authority over this arrangement and was free to reject it or seek better terms.NEXT: Prohibited transaction and other claims dismissed
Schofield dismissed the prohibited transaction claim under ERISA Section 406(a) because the complaint fails to allege that any ERISA fiduciary had actual or constructive knowledge that the defendants were receiving allegedly excessive compensation for the investment advice program. She found the complaint fails to allege that any ERISA fiduciary caused the plan to pay VRA the fees prescribed by the Nestle-VRA Agreement with actual or constructive knowledge that the fees were excessive.
She reiterated that the defendants are not ERISA fiduciaries with respect to the fees, and said Financial Engines is not an ERISA fiduciary with respect to the fees for the same reasons—namely that it does not have the requisite control over the amount of compensation it receives. Schofield pointed out that Nestle is a named fiduciary under the plan, but the complaint does not allege that Nestle knew the compensation under the Nestle-VRA Agreement was excessive, either overall or as to the portion retained by VRA.
The judge dismissed claims against defendants Voya Financial, Inc., Voya Institutional Plan Services, LLC and Voya Investment Management, LLC because the complaint fails to make specific allegations against them.Schofield did give Patrico 21 days to file any motion to replead.