Introduction

Service providers to 401(k) plans won another victory recently when the Eighth Circuit upheld the dismissal of an Employee Retirement Income Security Act (ERISA) class action. In McCaffree Financial Corp v Principal Life Insurance Co,(1) the court found that Principal Life was not a fiduciary under ERISA and ignored the Department of Labour's argument to the contrary. Following the trend in the Third(2) and Seventh(3) Circuits, the opinion provides helpful guidance on the limits of fiduciary status under ERISA, for both service providers and other targets of ERISA class actions.

McCaffree marks the third time in a row that a federal appeals court has declined to impose ERISA fiduciary status on 401(k) service providers in the face of strenuous pro-plaintiff arguments in Department of Labour amicus briefs.

Charging agreed fees not a fiduciary act

The plaintiff in McCaffree alleged that Principal Life, which provides record-keeping and other services to 401(k) plans, violated ERISA when it selected an initial investment menu and charged associated fees against the accounts of 401(k) plan participants. According to the plaintiff, Principal Life owed a duty to ensure that those fees were reasonable. However, the Eighth Circuit followed the rule that:

"a service provider's adherence to its agreement with a plan administrator does not implicate any fiduciary duty where the parties negotiated and agreed to the terms of that agreement in an arm's-length bargaining process."(4)

Therefore, Principal Life could not have breached any duty by charging agreed fees.(5)

Lack of nexus to challenged acts

The Eighth Circuit also rejected the plaintiff's four other arguments because of the absence of a nexus between any allegedly fiduciary act and the alleged breach. In doing so, the court applied the Supreme Court's admonition that the first (and potentially dispositive) question in breach of fiduciary duty cases under ERISA is whether the defendant "was acting as a fiduciary (that is, was performing a fiduciary function) when taking the action subject to complaint".(6)

The plaintiff contended that Principal Life had violated its fiduciary duty when it allegedly winnowed the initial investment menu from the 63 accounts listed in the contract to the 29 actually offered to plan participants.(7) The court held that even if Principal Life – rather than the plaintiff – had winnowed the list, that was not "the action subject to complaint" because the plaintiff had alleged that all 63 options were laden with excessive fees. The court noted that the average fee for the 29 accounts offered to participants was barely higher than the average fee for the other accounts.(8) In any event, the court noted, the plaintiff could have rejected any particular account.

Next, the plaintiff claimed that Principal Life had reserved the right to increase the fees and that this power cloaked the company with fiduciary status.(9) Once again, the court rejected the argument because there was no nexus between Principal Life's power and the alleged breach: the plaintiff did not allege that Principal Life had ever exercised its power to raise the fees.(10)

In an important footnote, the court also rejected the theory that Principal Life could have become a fiduciary even without exercising control over plan assets. Specifically, the plaintiff claimed that Principal Life could have become a fiduciary under the 'plan administration' part of ERISA's definition of 'fiduciary' – a theory that some plaintiffs have used in an effort to avoid the usual requirement that a defendant 'exercise' control over plan assets before it can become a fiduciary. The court found that the contract gave Principal Life no authority (exercised or not) to charge "unreasonable or fabricated expenses".

The court also rejected the theory that Principal Life became a fiduciary by serving as an investment manager to various investment options offered to 401(k) plans. Even if this qualified as 'investment advice' under ERISA, there was no nexus between the fees and any advice that the principal may have provided:(11)

"Because a service provider's fiduciary status under ERISA 'is not an all-or-nothing concept', McCaffree cannot support its allegations that the fees in the plan contract are excessive by pointing to an unrelated context in which Principal serves as an investment manager."

Finally, the court held that the plaintiff could not pursue its theory regarding allegedly excessive fees associated with the mutual funds in which Principal Life's accounts invested. Here too the theory foundered on the nexus requirement, as the reasonableness of the mutual fund fees was not the action subject to complaint. Instead, the dispute focused on other fees that had been fully disclosed in the contract.

For further information on this topic please contact Mark B BlockerSusan A StoneEric S Mattson or Anne E Rea at Sidley Austin LLP by telephone (+1 312 853 7000) or email (mblocker@sidley.comsstone@sidley.commemattson@sidley.com or area@sidley.com). The Sidley Austin website can be accessed at www.sidley.com.

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