The U.S. District Court for the Eastern District of Pennsylvania held that Lincoln National Life Insurance Company was not acting as a fiduciary when it invested amounts backing retained asset accounts for its own benefit.  

Lincoln issued a group life insurance policy, the terms of which did not specify the method in which any life insurance proceeds would be paid. However, the claim form explained that if the amount payable was at least $5,000, then a retained asset account would be established. The retained asset account bore interest at a rate equal to the national average for interest-bearing checking accounts as published by Bloomberg, plus one percent. A beneficiary could draw down the retained asset account by writing a check.  

Lincoln did not actually fund the retained asset account, which served as a bookkeeping device. The funds backing the retained asset account remained within Lincoln’s general assets, and Lincoln would only transfer the funds when a check was drawn on the account and presented for payment.

The district court’s analysis centered on whether Lincoln was acting as a fiduciary by virtue of exercising authority or control over plan assets. The district court first looked to whether Lincoln violated any terms of the plan in creating the retained asset accounts. As the plan document was silent on the method of payment, the district court found that Lincoln had not acted contrary to the plan’s terms.  

Next, the district court found that once Lincoln established the retained asset account, credited the account with the proper amount, and provided the beneficiary with the checkbook, practical control of the funds backing the retained asset account shifted to the beneficiary. As a result, Lincoln was not only not acting as a fiduciary when it invested those funds on its own behalf, but those funds were not plan assets under the terms of the plan.  

Seemingly overlooked was whether Lincoln’s decision to pay death benefit proceeds of at least $5,000 through retained asset accounts could serve as the foundation for a breach of fiduciary duty claim. In other words, the district court did not appear to consider the issue of whether Lincoln was exercising discretion in the administration of the plan by selecting the method of payment (i.e., creating retained asset accounts), and, in exercising that discretion, whether Lincoln acted solely in the interest of beneficiaries under the plan. Although the district court briefly addressed Lincoln’s management and administration of the plan in several footnotes, and noted that the selection of a mode of payment is a discretionary function in one of those footnotes, the analysis largely misses the point. No mention is made in the opinion of whether the interest credited to retained asset accounts by Lincoln was competitive with other insurers in the market, or what considerations were used in setting the interest rate. (Edmonson v. Lincoln Nat’l Life Ins. Co., EDPA 2012)