An employer lost its appeal in an ERISA suit filed on behalf of employees against a company it contracted with to provide investment services to employees who participated in a retirement plan. Although the employer claimed the company breached its fiduciary duty by charging employees excessive fees, the Eighth Circuit agreed with the lower court that the defendant was not acting as a fiduciary at the time the fees and expenses were negotiated and that any subsequent fiduciary duty it owed lacked a sufficient nexus with the excessive fee allegations (McCaffree Financial Corp. v. Principal Life Insurance Co., January 8, 2016, Gruender, R.). The employer sponsors for its employees a retirement plan governed by ERISA. In September 2009, it entered into a contract with Principal Life, which agreed to offer investment options and associated services to employees participating in the employer’s retirement plan. Participants could maintain retirement contributions in a “general investment account” offering guaranteed interest rates or allocate contributions to various “separate accounts,” which Principal created to serve as vehicles for investing in Principal mutual funds. Each separate account was assigned to a different mutual fund and Principal reserved the right to limit which separate accounts were available to participants. The employer also had the ability to limit the accounts in which its employees could invest. Under these provisions, the full list of 63 accounts included in the plan contract was narrowed to 29 separate accounts (and associated mutual funds) made available. Fees and expenses. In return for providing access to these separate accounts, participants paid Principal both management fees and operating expenses. Principal assessed the management fees as a percentage of the assets invested in a separate account, and this percentage varied for each account according to its associated mutual fund. In addition, Principal could unilaterally adjust the management fee for any account, subject to a cap (generally three percent) specified in the contract. Operating expenses were not limited, though the contract restricted Principal to passing through only those expenses necessary to maintain the separate account, such as taxes and fees paid to third parties. Lawsuit. Five years after entering the contract, the employer filed a class action on behalf of all employees participating in the plan, alleging that Principal charged participants who invested in separate accounts “grossly excessive investment management and other fees” in violation of its fiduciary duties of loyalty and prudence under sections 404(a)(1)(A) and (B) of ERISA. The employer claimed that the separate accounts served no purpose other than to invest shares of Principal mutual funds and therefore involved minimal additional expense for Principal. Because each mutual fund charged its own layer of fees, the employer claimed the additional fees were unnecessary and excessive. The district court dismissed the complaint, holding that Principal was not acting as a fiduciary at the time the fees and expenses were negotiated, and that any subsequent fiduciary duty it owed lacked a sufficient nexus with the excessive fee allegations. Not fiduciary at relevant time. Affirming, the Eighth Circuit explained that, according to ERISA, a party not specifically named as a fiduciary of a plan owes a fiduciary duty only “to the extent” that party (i) exercises any discretionary authority or control over management of the plan or its assets; (ii) offers “investment advice for a fee” to plan members; or (iii) has “discretionary authority” over plan “administration.” In the appellate court’s view, the phrase “to the extent” meant that fiduciary status was an all-or-nothing concept. Thus, the issue was whether Principal was acting as a fiduciary “when taking the action subject to the complaint.” Essentially, the provision requires a nexus between the alleged basis for the fiduciary responsibility and the alleged wrongdoing. No fiduciary duty during negotiations. Here, because Principal was not named as a fiduciary of the plan, the employer had to plead facts showing that Principal acted as a fiduciary when taking the alleged wrongful action. This, it failed to do. For one thing, Principal owed no duty to participants during arms-length negotiations with the employer, and the contract they negotiated clearly identified each separate accounts management fee and authorized Principal to pass through additional operating expenses. 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,” explained the court. Up until the employer signed the contract, it could have rejected the terms, so Principal could not have maintained or exercised any “authority” over the plan and thus had no fiduciary duty. No nexus between any fiduciary duty and excessive fees. The court rejected the employer’s argument that the process of winnowing down the available separate accounts from 63 to 29, after the contract was entered, gave rise to a fiduciary duty requiring Principal to ensure fees on those accounts were reasonable. At no point did the employer plead a connection between the act of winnowing down and the excessive fee allegations. Likewise, it failed to plead a nexus between its allegations and Principal’s discretion to increase account management fees and to adjust operating expenses. The complaint only challenged the fees as provided for by the contract but was devoid of any allegation that Principal abused its discretion by passing through fees beyond what the contract authorized. In addition, while the employer claimed that Principal provided participants with “investment advice,” giving rise to a fiduciary duty, the appeals court again found no allegations of a nexus between the separate account fees and any advice offered. To the contrary, the employer claimed that all investment options charged excessive fees.
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