In a decision issued last week, the Seventh Circuit made clear that discretion isn’t always required for an entity to be a functional fiduciary.   But at the same time, the Court reaffirmed that a functional fiduciary is only answerable under ERISA when it is acting as a fiduciary.

In Leimkuehler v. American United Life Insurance Co., No. 12-1081, 12-1213, & 12-2536 (7th Circuit, April 16, 2013), the Seventh Circuit affirmed the district court’s ruling that an insurance company’s revenue-sharing practices did not breach a fiduciary duty under ERISA because the company wasn’t wearing its fiduciary hat in setting up or carrying out those practices.

Robert Leimkuehler, the trustee of his company’s 401(k) plan (the “Plan”), filed a class action against the American United Life Insurance Company (“AUL”), which offered investment, record-keeping, and other administrative services to the Plan.  Leimkuehler alleged that AUL breached a fiduciary duty by collecting and not disclosing revenue-sharing payments from the mutual funds it offered.  The district court granted AUL’s motion for summary judgment, ruling that AUL was not a fiduciary of the Plan with respect to its revenue-sharing practices.

On appeal, Leimkueler argued first that AUL was a “functional fiduciary” because it had a hand in deciding which investment funds and share classes it would make available to the Plan’s participants.   The court noted, however, that the mere act of limiting the universe of available investment options did not involve sufficient discretion to make AUL a fiduciary and that it was Leimkuehler who had the final say on which funds to offer in any event.  Thus the court rejected  what it termed the “product design” theory of fiduciary status.

Leimkuehler next argued that AUL was a fiduciary because it managed and administered plan assets by tracking participants’ contributions, investing participants’ funds, and performing other ministerial activities.  Leimkuehler conceded that these activities did not involve any discretion, but noted that ERISA’s definition of a “functional fiduciary” in 29 U.S.C. § 1002(21)(A) extends to the exercise of “any authority or control with respect to the management or disposition” of plan assets. 

The Seventh Circuit agreed that a party exercising control over the “management and disposition of plan assets” is a fiduciary even if it has no discretionary authority, but the court noted that such an entity is a fiduciary only as to those specific functions.  Because Leimkuehler’s complaint did not allege mismanagement of Plan assets, the Court rejected this theory as well.

Finally, the Court also rejected as “unworkable” a theory advanced by the Department of Labor in an amicus brief, that by not exercising a power it had to remove or substitute fund offerings, AUL had effectively exercised discretion over the selection of investment options.

As the Court pointed out, the practice of revenue-sharing between mutual funds and investors is commonplace in the 401(k) services industry and has recently become a source of substantial litigation.  Nevertheless, the Court expressed no opinion on the merits of revenue sharing and instead limited its ruling to the narrow question whether Leimkuehler had stated a viable fiduciary duty claim on the facts before it.  This case is an important reminder that the determination of functional fiduciary status is highly fact-specific and that the scope of fiduciary liability is strictly limited in the case of functional fiduciaries.