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In ERISA Class Action, Third Circuit Holds A Service Provider Is Not A Fiduciary With Respect To Fees Charged To 401(k) Plans

Financial Services/Consumer Class Actions and ERISA Litigation Update

In Santomenno v. John Hancock,1 the U.S. Court of Appeals for the Third Circuit affirmed the dismissal of an ERISA class action alleging that a retirement plan service provider charged excessive fees to 401(k) plans, concluding that plaintiffs failed to allege fiduciary status. Santomenno presents a noteworthy victory for service providers in the insurance and financial services industry, many of whom have been the target of ERISA class actions alleging excessive fees charged to 401(k) plans.

Under ERISA, plaintiffs had to show that John Hancock Life Insurance Company (U.S.A.) acted as a fiduciary when it charged fees that plaintiffs claimed were excessive. Plaintiffs advanced two theories in support of Hancock’s fiduciary status. First, plaintiffs claimed Hancock had discretionary authority over plan management because it offered a menu of investment options to plan trustees and retained the ability to change the menu and related fees. Second, plaintiffs claimed Hancock offered investment advice to the plans. The U.S. District Court for the District of New Jersey dismissed all counts on the grounds that plaintiffs failed to plead Hancock’s fiduciary status. The Third Circuit affirmed, concluding that Hancock was not an ERISA fiduciary with respect to the challenged fees.

Creating And Monitoring A Menu Of Investment Options Is Not A Fiduciary Activity

Under their first theory, plaintiffs alleged that Hancock exercised discretionary authority over plan management by offering investment options to the plans. Pursuant to the contract between Hancock and plan trustees, Hancock offered a variety of investment options – the “Big Menu” of options – which were primarily composed of Hancock mutual funds and other independent funds. From that “Big Menu,” plan trustees selected a smaller number of investment options to offer to plan participants – the “Small Menu.” The contract allowed Hancock to change investment options in the “Big Menu.” According to plaintiffs, Hancock’s initial selection and monitoring of funds on the “Big Menu,” as well as its ability to alter those options, constituted an exercise of discretionary authority over plan management.2

The court found this theory foreclosed by a trio of Court of Appeals decisions: Renfro v. Unisys Corp.,3 Hecker v. Deere & Co.,4 and Leimkuehler v. American United Life Insurance Co.,5 which held that assembling a menu of investment options, without more, cannot give rise to fiduciary status. Citing the Seventh Circuit’s decision in Leimkuehler, the Third Circuit held that assembling the “Big Menu” could not confer fiduciary status because the plan trustees had “final authority over what funds would be included on the Small Menus.”6 In response to the argument that Hancock selected funds with higher fees, the court noted that the plan trustees and Hancock negotiated the fees at arm’s length. Citing Renfro, the court reiterated the rule that “a service provider owes no fiduciary duty with respect to the negotiation of its fee compensation.”7 The court stated, “[n]othing prevented the trustees from rejecting John Hancock’s product and selecting another provider; the choice was theirs.”8

Ability To Change Investment Options Does Not Trigger Fiduciary Power

Next, the court held Hancock did not become a fiduciary by retaining the authority to change the investment options on the “Big Menu.” The court first noted this activity lacked any nexus to the challenged conduct. Under ERISA, a plaintiff alleging a breach of fiduciary duty “must plead that the defendant was acting as a fiduciary when taking the action subject to complaint.” Because Hancock’s theoretical ability to change the “Big Menu” had nothing to do with the alleged breach, the court rejected this theory.9

Plaintiffs Failed To Plead John Hancock Was An Investment Advisor

The court next examined whether Hancock acted as an investment advisor in a way that gives rise to fiduciary status. Once again, the court noted that this alleged fiduciary duty had no nexus to the alleged breach in the complaint.10 Nonetheless, the court concluded that plaintiffs’ allegations did not meet the Department of Labor’s regulatory definition of “investment advice.”11 The Department has promulgated a five-factor test for determining whether an entity is an investment advisor within the meaning of ERISA. Plaintiffs argued that the regulation was no longer valid because the Department had proposed, and then withdrawn, a new regulation, but the court held that the Department’s regulation was still on the books and still binding.12

Department Of Labor Theories Gain No Traction

The court also rejected arguments offered by the Department of Labor, which filed an amicus brief in support of the plaintiffs, available here (Sidley represented the American Council of Life Insurers in its submission of an amicus brief in support of Hancock’s position, available here; much of that brief addressed the Department’s arguments.). The Department argued that Hancock exercised discretionary authority under ERISA when it retained the ability to change investment options on the menu offered to plan trustees. The court noted that this argument was expressly rejected by the Seventh Circuit’s opinion in Leimkuehler. Moreover, the court held that Hancock’s ability to substitute investment options is not relevant to the alleged conduct – i.e. charging allegedly excessive fees.13


1Case No. 13-3467 (3d Cir. Sept. 26, 2014).
2Santomenno, No. 13-3467, slip op. at 18.
3671 F.3d 314 (3d Cir. 2011).
4556 F.3d 575 (7th Cir. 2009).
5713 F.3d 905 (7th Cir. 2013).
6Santomenno, No. 13-3467, slip op. at 19.
7Id.
8Id. at 20 (citing Hecker, 556 F.3d at 538).
9Id. at 23.
10Id.
11Id. at 24.
12Id. at 27.
13Id. at 29
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ERISA Litigation

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