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.,1 and 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