Plan fiduciaries are held to the highest performance standards and can be personally liable for breaches of fiduciary responsibility. Because of this potential liability, there should be clear and rational rules enabling those who provide services to plans to know when they have crossed the line.
I recently wrote a post called the “Teflon Fiduciary” in which I argued that the U.S. Court of Appeals for the Fifth Circuit had permitted investment advisers functioning as fiduciaries to avoid responsibility for imprudent or inappropriate advice. By looking to the manner in which the adviser in question was paid rather than whether he was functioning as a fiduciary, that court set the line in the wrong place. The rule may have been clear, but it wasn’t rational and it excluded too many advisers.
We have now had a decision from a federal district court in another part of the country that seems to err in the opposite direction by including as fiduciaries people who the drafters of ERISA probably never intended to cover.
Mass Mutual marketed 401(k) investment and recordkeeping services to two 401(k) plans sponsored by Golden Star, and plaintiffs challenged (among other practices) Mass Mutual’s receipt of revenue sharing payments from investment providers in connection with plan investments. The ERISA self-dealing provision, that plaintiffs claimed, had been violated applied only to fiduciaries. Their claims would fail if Mass Mutual was not a fiduciary.
In a recent ruling denying summary judgment to Mass Mutual, the court found that Mass Mutual was a “functional fiduciary” because it had the discretion to unilaterally set fees up to a maximum and it actually exercised that discretion. Specifically, Mass Mutual determined its own compensation, took fees out of separate accounts, and had discretion to offset some or all of the revenue sharing payments against management fees. The same decision rejected plaintiffs’ claims that Mass Mutual was also a fiduciary because it had contractual authority to add, delete or substitute mutual funds available on the plan menu-and therefore influence the amount of revenue sharing it was paid- because Mass Mutual had never exercised its authority to change funds on the menu during the limitations period. This is consistent with the position taken by most courts that have addressed this issue. (See, e.g., Leimkuehler v. Am. United Life Ins. Co., 713 F. 3d 905 (7th Cir. 2013))
In its amicus briefs filed in other recent cases, the Department of Labor has asserted the same positions taken by plaintiffs in Golden Star, but is this a rational and clear basis for determining fiduciary status? It would appear to be more logical to find that the person must first be determined to be a fiduciary based on other actions it took with respect to the plan, and then examine whether a breach of fiduciary duty occurred in setting the level of fiduciary compensation.
If setting its own compensation level is what makes a vendor a fiduciary, then almost any plan record-keeper could be held to be a fiduciary under the reasoning adopted by the Golden Star court because most form contracts we see permit plan vendors to change at least some rates for service, by simply providing advance notice. However, under longstanding ERISA authority, Reg. 2509.75-8 on fiduciary responsibility provides in Q&A D-2 that those who maintain plan records and prepare plan reports “who have no power to make any decisions as to plan policy, interpretations, practices or procedures” are not fiduciaries.
These recent decisions make a clear case for establishing more consistent standards so that plan service providers know in advance whether they have fiduciary responsibilities and exposure.
Amidst much controversy, the Department of Labor is undertaking to update its 1975 regulations on the definition of “fiduciary.” We don’t know when we will see a new proposal or what it will say. However, if the new proposal does not establish rational distinctions that help prevent service providers from inadvertently assuming fiduciary status, perhaps it is time for Congress to revisit this issue, as the court cases in this area don’t seem to be t advancing that goal.