If you adopted a pre-approved 401(k) plan through an outside vendor such as Fidelity, Vanguard, or one of the large insurance companies, your choices were limited to what your vendor offered. Further, the documents you had to sign to adopt the plan stated that the vendor was not a fiduciary when it selected available investments, handled your recordkeeping, prepared your reports and employee communications or determined fees.

This is a distinction that can make a big difference, because fiduciaries must make decisions in the interests of participants, and are prohibited from self-dealing.

In the 401(k) class actions challenging plan fees, plaintiffs’ counsel has maintained that vendors were, in fact, functioning as fiduciaries when they selected available investments and set fees, regardless of what their documents said. Under ERISA, management and control over plan administration or plan assets is required for a vendor to have fiduciary status, and plaintiffs have had an uphill battle on this issue – see, for example, the decision by the 7th Circuit court of appeals in Leimkuehler v. Am. United Life Ins. Co. However, a federal district court in Haddock v. Nationwide Financial Services ruled that Nationwide’s ability to determine available funds could make it a fiduciary.

After failing to convince the court in Leimkuehler, the Department of Labor has again joined the fray on plaintiffs’ side by filing a brief urging the federal appeals court for the 3rd circuit to overturn a lower court decision and find that John Hancock was a fiduciary of its 401(k) plans. The case is Santomenno v. John Hancock Life Insurance Company, and it is worth watching.

The position taken by the Department of Labor in its brief is that John Hancock was a fiduciary for two reasons:

  1. John Hancock retained the right to unilaterally substitute or delete mutual funds from its platform or to change the share classes in which the plans were invested in its discretion. The employer’s only recourse if it objected was to terminate its contract with John Hancock and pay a penalty.
  2. John Hancock didn’t negotiate certain fees and retained the unilateral authority to increase its own fees under the contract.

The Department of Labor also faulted the district court for reaching a decision at the pleading stage without examining the facts, since determining fiduciary status is a “highly fact-intensive inquiry.”

What are the practical implications?

The plan documents we review usually contain provisions similar to those in the John Hancock arrangement. In fact, the marketing strategy of vendors has been premised on the fact that they are not ERISA fiduciaries. While the adopting employers of 401(k) plans would still be fiduciaries responsible for overall plan operation and compliance if the Department of Labor’s position is upheld, and vendors would be fiduciaries for the limited purposes specified by the Department of Labor, they could be liable for selecting investment options that pay them (or their affiliates) higher revenue sharing or for not making more non-proprietary funds available and could be personally liable for related fiduciary breaches. Affected vendors would also have to reconfigure their arrangements to deal with fiduciary conflicts.

The Department of Labor will be re-issuing regulations determining fiduciary status as well, and might deal with this issue in new regulatory authority. In the meantime, adopting plan sponsors should stay tuned.