January 25, 2016

ERISA Claim Knocked Off the Pedestal - Provider of 401(k) Investment Platform Held Not to Have Fiduciary Liability

Andrew Braid, Andrew Oringer, Aryeh Zuber

Dechert LLP

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Over the years, U.S. employers that sponsor “401(k)” and other retirement plans, and plan fiduciaries, have increasingly become the subject of significant and potentially expensive litigation under the Employee Retirement Income Security Act of 1974 (“ERISA”). Examples of ERISA litigation that seems to have had a particularly significant market impact include, for example, so-called “stock drop” cases and cases in which it is alleged that excessive fees have been paid in connection with a plan’s investment alternatives.

More recently, some plaintiffs – and plaintiffs’ attorneys – have been directing their attention to providers of investment platforms. Generally, these claims have alleged that the platform providers are themselves fiduciaries and, as such, may be liable under ERISA for breaches of fiduciary duty. One such case was brought by McCaffree Financial Corporation (“McCaffree”), the sponsor of a 401(k) plan (the “Plan”), against Principal Life Insurance Company (“Principal”).

Earlier this month, on January 8, 2016, the U.S. Court of Appeals for the Eighth Circuit decided McCaffree Financial Corp. v. Principal Life Insurance Co.,¹and affirmed the dismissal of all claims against Principal. In McCaffree, Principal had been retained as a provider of the platform for the Plan’s investment options and to provide a number of other Plan-related administrative services. The contract further provided that participants would pay to Principal certain management fees and operating expenses.

McCaffree alleged on behalf of plan participants, among other things, that Principal was a plan fiduciary by virtue of selecting the 63 investment alternatives available for inclusion in the Plan’s investment menu, and by virtue of selecting, from among these 63 alternatives, the specific 29 investment options that were ultimately made available under the Plan. McCaffree then went on to allege that Principal’s fees were “grossly excessive” in violation of Principal’s fiduciary duties of loyalty and prudence under ERISA.

The Eighth Circuit rejected the argument that Principal’s making available the 63 initial investment alternatives constituted an exercise of “discretionary authority” with respect to the Plan that would cause Principal to become an ERISA fiduciary. The court stated that, because McCaffree was free to refuse to enter into the contract, Principal could not have exercised fiduciary authority and therefore could not have breached any fiduciary duty.² The court also rejected the argument that Principal breached its fiduciary duty in connection with choosing 29 investment options ultimately included under the Plan. The court stated that, because McCaffree did not assert that only some of the investment alternatives had excessive fees (or that Principal used its selection authority to cause Plan participants to have access only to higher-fee options), McCaffree had “failed to plead a connection between the act of winnowing down the available accounts and the excessive fee allegations.”³ According to the court, the alleged excessive fees (not Principal’s selection of the 29 options) was “the action subject to complaint,” and therefore McCaffree could not “base its excessive fee claims on any fiduciary duty Principal may have owed while choosing those accounts.”⁴

McCaffree is generally good news for platform providers, as it is yet another case⁵ that declines to impose fiduciary liability on the provider. There are, however, causes for concern. In this regard, it is of concern that the case not only was brought, but also was pursued all the way to decisions in both the district and circuit courts, resulting not only in the risk that the case might be lost, but also presumably in significant litigation-related expenses. Further, McCaffree’s arguments, even though ultimately rejected by both the district and circuit courts, were supported by an amicus brief submitted by the Department of Labor, which was at least the third such brief filed by the Department of Labor in an excessive-fee case since 2013.⁶ It is also worthy of note that a number of similar claims have indeed resulted in settlement (and settlement-related) activity in other cases.⁷

Footnotes

1) No. 15-1007 (8th Cir. Jan 8, 2016).

2) The Eighth Circuit cited with approval the cases of Hecker v. Deere & Co., 556 F.3d 575 (7th Cir. 2009), and Renfro v. Unisys Corp., 671 F.3d 314 (3d Cir. 2011).

3) It is noted that the McCaffree court emphasized that Principal had adequately disclosed fees in the negotiation of the investment services contract.

4) McCaffree also argued that Principal was permitted unilaterally to adjust its fees subject to a cap and to charge to the investment options (and thereby the plan participants) those operating expenses that were reasonably necessary for administering the options, and that this discretion supported a claim for breach of fiduciary duty. The court rejected this argument. A number of other allegations were also made and rejected.

5) See cases cited in footnote 2; see also Santomento v. John Hancock Life Ins. Co., 768 F.3d 284 (3d Cir. 2014); Leimkuehler v. Am. United Life Ins. Co., 713 F.3d 905 (7th Cir. 2013).

6) For example, the Department of Labor also filed amicus briefs in the Santomento case and Leimkuehler case. See footnote 5 above (for citations to the appellate opinions in those cases).

7) See Final Order and Consent Judgment, Haddock v. Nationwide Life Insurance Co., No. 3:01-cv-1552 (D. Conn. Apr. 9, 2015); Final Approval and Judgment, Golden Star, Inc. v. Mass Mutual Life Ins. Co., No. 3:11-cv-30235 (D. Mass. June 25, 2015); see also Final Approval Order and Judgment, Healthcare Strategies Inc. v. ING Life Ins. & Annuity Co., 3:11-cv-00282 (D. Conn. Sept. 26, 2014) (approving settlement worth US$415 million to end a class action accusing an investment platform provider of forming revenue sharing agreements with mutual funds that amounted to kickbacks and violated ERISA). In addition, in several cases, the court has not been willing to rule in favor of the platform provider at early stages in the litigation. See, e.g., Kruger v. Novant Health, Inc., No. 1:14-cv-208, (M.D.N.C. Sept. 17, 2015); Golden Star, Inc. v. Mass Mutual Life Ins. Co., 22 F. Supp. 3d 72 (D. Mass. 2014).

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