McCaffree marks the third time in a row that a federal appeals court has declined to impose ERISA fiduciary status on 401(k) service providers in the face of strenuous, pro-plaintiff arguments in Department of Labor amicus briefs.
Charging Agreed-Upon Fees Is Not a Fiduciary Act
The plaintiff in McCaffree alleged that Principal Life, which provides record-keeping and other services to 401(k) plans, violated ERISA when it selected an initial investment menu and charged associated fees against the accounts of 401(k) plan participants. According to the plaintiff, Principal Life owed a duty to ensure that those fees were reasonable. But the court followed the rule that “a service provider’s adherence to its agreement with a plan administrator does not implicate any fiduciary duty where the parties negotiated and agreed to the terms of that agreement in an arm’s-length bargaining process.”4 As a result, Principal Life could not have breached any duty by charging agreed-upon fees.5
Other Fiduciary Theories Rejected for Lack of “Nexus” to Challenged Acts
The court also rejected the plaintiff’s four other arguments because of the absence of a “nexus” between any allegedly fiduciary act and the alleged breach. In doing so, the court applied the Supreme Court’s admonition that the first (and potentially dispositive) question in breach of fiduciary duty cases under ERISA is whether the defendant “was acting as a fiduciary (that is, was performing a fiduciary function) when taking the action subject to complaint.”6
The plaintiff contended that Principal Life violated its fiduciary duty when it allegedly winnowed the initial investment menu from the 63 accounts listed in the contract to the 29 actually offered to plan participants.7 In the Eighth Circuit’s view, even if Principal Life—rather than the plaintiff—winnowed the list, that was not “the action subject to complaint” because the plaintiff had alleged that all 63 options were laden with excessive fees. The court noted that the average fee for the 29 accounts offered to participants was barely higher than the average fee for the other accounts.8 In any event, the court noted, the plaintiff could have rejected any particular account.
Next, the plaintiff claimed that Principal Life reserved the right to increase the fees and that this power cloaked the company with fiduciary status.9 Once again, the court rejected the argument because there was no nexus between Principal Life’s power and the alleged breach: The plaintiff did not allege that Principal Life ever exercised its power to raise the fees.10 In an important footnote, the court also rejected the theory that Principal Life could have become a fiduciary even without exercising control over plan assets. Specifically, the plaintiff said Principal Life could have become a fiduciary under the “plan administration” prong of ERISA’s definition of fiduciary—a theory some plaintiffs have used in an effort to avoid the usual requirement that a defendant “exercise” control over plan assets before it can become a fiduciary. The Eighth Circuit found that the contract did not give Principal Life any authority (exercised or not) to charge “unreasonable or fabricated expenses.”
The Eighth Circuit also rejected the theory that Principal Life became a fiduciary by serving as an investment manager to various investment options offered to 401(k) plans. Even if this qualified as “investment advice” under ERISA, there was no “nexus” between the fees and any advice Principal may have provided.11 “Because a service provider’s fiduciary status under ERISA ‘is not an all-or-nothing concept,’” the court said, “McCaffree cannot support its allegations that the fees in the plan contract are excessive by pointing to an unrelated context in which Principal serves as an investment manager.”
Finally, the court held that the plaintiff could not pursue its theory about allegedly excessive fees associated with the mutual funds in which Principal Life’s accounts invested. Here too the theory foundered on the “nexus” requirement, as the reasonableness of the mutual fund fees was not the action “subject to complaint.” Instead, the dispute focused on other fees that had been fully disclosed in the contract.
Sidley represents Principal Life in McCaffree.
1 No. 15-1007, 2016 U.S. App. LEXIS 214 (8th Cir. Jan. 8, 2016).
2 Santomenno v. John Hancock Life Ins. Co. (U.S.A.), 768 F.3d 284 (3d Cir. 2014); Renfro v. Unisys Corp., 671 F.3d 314 (3d Cir. 2011).
3 Leimkuehler v. American United Life Ins. Co., 713 F.3d 905 (7th Cir. 2013); Hecker v. Deere & Co., 556 F.3d 575 (7th Cir. 2009).
4 McCaffree, 2016 U.S. App. LEXIS 214, at *9.
6 Pegram v. Herdrich, 530 U.S. 211, 225-26 (2000).
7 McCaffree, 2016 U.S. App. LEXIS 214, at *10-11.
8 Id. at *11 n.2.
9 Id. at *11.
10 Id. at *11-12.
11 Id. at *14.
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