Pension & Benefits News Investment of plan assets in expensive products offered by subsidiary of plan sponsor sufficient to state claim for fiduciary breach
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Tuesday, March 19, 2019

Investment of plan assets in expensive products offered by subsidiary of plan sponsor sufficient to state claim for fiduciary breach

By Pension and Benefits Editorial Staff

401(k) plan participants alleged facts sufficient to support a claim for improper self-dealing against plan fiduciaries who invested plan assets in allegedly overpriced proprietary investment products offered by a subsidiary of the plan sponsor, according to a federal trial court in Nebraska. The participants also maintained a plausible claim for relief for ongoing ERISA violations that occurred within the applicable statute of limitations.

Contract with subsidiary gives rise to self-dealing claim. Mutual of Omaha (Mutual) sponsors a 401(k) long-term savings plan for its employees. United of Omaha Life Insurance Company (United) is a wholly-owned subsidiary of Mutual that provides services to qualified retirement plans that contract with a “Separate Account K.” Plan participants brought suit, alleging that, by investing plan assets through the Separate Account K and choosing the United-managed “Guaranteed Account” as an investment option, plan fiduciaries breached their duties of loyalty under ERISA. Stressing that the plans were more expensive than 90 percent of the plans in the United States, the participants specifically charged the fiduciaries with improper self-dealing.

The fiduciaries brought a 12(b)(6) motion to dismiss the complaint. The court rejected the motion, finding that the participants had alleged sufficient facts to establish a plausible claim for relief that occurred within the applicable statute of limitations.

Plausible claim for breach of duty of loyalty. The gravamen of the participants’ complaint was that, by hiring the subsidiary of the plan sponsor at above-market rates, plan fiduciaries breached their duty of loyalty. The participants maintained that the group annuity Special Account K was structured to allow United (and thereby, Mutual) to (a) collect fees from plan participants that exceeded the amount charged by investment providers and, (b) to hide the fees from the plan participants. Specifically, the participants noted that the average per-participant fee for comparable plans was $64, while the fee paid by the plan was $195 per-participant. Mutual countered that the purchased product was superior to others in the market, justifying its cost.

The participants, highlighting the alleged self-dealing, further charged that: (a) the contractual arrangement allowed United to retain more of the investment return for itself than it paid to plan participants, and (b) the fees paid by Mutual to United far exceeded market rates. Mutual, by contrast, defended the use of an affiliated service provider as having been approved by the Labor Department and Congress.

The court conceded that plan fiduciaries may use affiliated service providers. However, the court cautioned that the party to the self-dealing transaction has the burden of establishing that the use of the affiliated service provider is inherently fair to the plan. Accordingly, ensuring that the fiduciaries would have to meet their burden at trial, the court rejected the motion to dismiss, concluding that the facts alleged by the participants constituted a plausible claim of misconduct in the form of a breach of fiduciary duty and loyalty.

SOURCE: Lechner v. Mutual of Omaha Insurance Company (DC NE).

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