By Pension and Benefits Editorial Staff
An insurance company that provided a stable value fund to employee benefit plans was not subject to liability under ERISA as a fiduciary, even though it unilaterally set the fund’s quarterly Credited Interest Rate which, in large measure determined its compensation, according to the U.S. Court of Appeals in Denver (CA-10). In affirming a federal trial court, appellate court stressed that the insurer was not empowered with the authority of a functional fiduciary because contractual restrictions on fund withdrawals did not actually prevent plans or participants from rejecting the rate by leaving the fund without penalty. In addition, the court ruled that the insurer was not subject to liability as a non-fiduciary party in interest for the alleged prohibited use of plan assets because the legal restitution (disgorgement of profits) being sought by the plan participants did not qualify as equitable relief authorized under ERISA Sec. 502(a)(3).
Unilateral calculation of credited interest rate under stable value fund. Great-West Life & Annuity Insurance Company, manages a stable value investment fund that is offered to plan sponsors as an investment option for plan participants. The Key Guaranteed Portfolio Fund (KGPF) guarantees capital preservation by ensuring that the participants will never lose the principal they invest or the interest they earn, which is credited daily to their accounts.
Great-West deposits the money plan participants have invested in the KGPF into it general account. That account is invested in fixed-income instruments, such as Treasury bonds, corporate bonds, and mortgage-backed securities.
Money invested in the KGPF earns interest at the “Credited Interest Rate.” The Credited Interest Rate is not specified in the contract between Great-West and the plans and is, thus, not the subject of arm’s length negotiations. Rather, Great West unilaterally, without input from the plans or plan participants, sets the Credited Interest Rate quarterly. The new rate (which may never fall below zero percent) is announced at least two business days before the start of each quarter.
Great-West retains as revenue the difference between the total yield on the KGPF’s monetary investments and the Credited Rate (i.e. “margin” or “spread”). Great-West further returns as profit the portion of the margin exceeding costs. As of 2016, the total KGPF-associated profit Great-Western had earned was in excess of $120 million.
Plans disappointed with the Credited Interest Rate have the option to terminate their relationship with Great-West. However, Great-West reserves the right to defer payment of a plan’s KGPF money back to the plan for up to 12 months.
Plan participants may withdraw their principal and accrued interest at any time without paying a fee. However, plan participants who withdraw funds have limited alternative options, as Great-West contractually prohibits plans offering the KGPF from also offering any other stable value funds or products with comparable risk portfolios.
The Credited Rate dropped from 3.55 percent before the financial crisis in 2008, to 1.10 percent in 2016. However, while the Credited Rate increased only once during that time period (in 2013), Great-West’s margin remained relatively constant, between 2-3 percent.
A plan participant brought suit against Great-West in 2016, on behalf of all employee benefit plan participants who have invested in KGPF since 2008. The participants alleged that Great-West breached its general duty of loyalty under ERISA Sec. 404 by: (1) setting the Credited Rate for its own benefit, rather than for the plans and plan participants; (2) setting the Credited Rate artificially low and retaining the difference as a profit; and (3) charging excessive fees. Great-West was subject to fiduciary liability, the participants maintained, because it exercised authority and control over the quarterly Credited Rate and, by extension, controlled its own compensation.
The trial court granted summary judgment to Great-West, concluding that the company was not acting as a fiduciary of the plans or the participants. Specifically, the court explained that Great-West’s power to determine the Credited Rate did not render it a fiduciary because plan participants could “veto” the selected rate by withdrawing their money from the KGPF. Further, the court ruled that Great-West did not have control over its compensation sufficient to make it a fiduciary because the ultimate amount of money it earned depended on the participants, who elected whether or not to keep their assets in the fund each quarter.
Contractual transfer restrictions did not impose fiduciary status on Great-West. Initially, the appeals court explained that a service provider who takes unilateral action beyond the specific terms of the contract with respect to the management of a plan or its assets will be a fiduciary, unless the plan or plan participants have the unimpeded ability to reject the service provider’s actions or terminate the relationship with the service provider. Fiduciary status, thus, turns on whether the service provider can force a plan or plan participant to accepts its decision regarding plan management or plan assets. In the event plan and plan participants have a “meaningful opportunity” to reject the service provider’s unilateral decision, the service provider will not be a fiduciary.
On appeal, the participants maintained that Great-West’s ability to set the Credited Rate rendered it a fiduciary because neither a plan nor its participants could reject the changes to the rate. The participants’ argument was based on two factors: (1) the contractual right retained by Great-West to make withdrawing plans wait for up to 12 months before receiving KGPF funds, and (2) the prohibition on plans offering comparable investment options to participants.
Potential 12-month waiting period. Great-West maintained that the contractual option to delay the return of a departing plan’s funds did not establish fiduciary status because it never exercised the right to impose the waiting period. Great-West found grounds for its position in ERISA 3(21)(A) which confers fiduciary status on a service provider only to the extent that it “exercises” any discretionary authority or discretionary control over plan assets.
In distinguishing cases cited by the participant in which penalties were actually imposed, the court noted that the waiting period would not be triggered until the option was exercised by Great-West. The court could find no cases supporting the suggestion that fiduciary status could be based on service provider’s unexercised contractual option to restrict or penalize a withdrawal. Moreover, the court stressed that there was no evidence that the prospect of the waiting period actually deterred any plan from exiting the KGPF or locked them into the Credited Rate for 12 months.
Prohibition of comparable investment options. The participants argued that they were effectively unable to reject the Credited Interest Rate by transferring assets out of the KGBF without penalty because Great-West prohibited plans from offering alternative low-risk investment options along with the KGBF.
Initially, the court found no case support for basing a service provider’s fiduciary status solely on a participant’s lack of alternative investment options or on restrictions on a participant’s ability leave a fund. In addition, the participants offered no evidence that the competing fund restriction actually forced any participants to accept the Credited Rate or affected their decision to stay with or leave the KGPF.
Great-West did not control own compensation. A service provider that exercises unilateral control over the factors that determine its actual amount of compensation will be found to be a fiduciary. However, the court’s ruling that the participants failed to establish Great-West’ authority or control over the Credited Rate necessitated the conclusion that Great-West did not have authority or control over its compensation.
Great-West not subject to non-fiduciary party in interest liability. Alternatively, the participants maintained that Great-West was a nonfiduciary party in interest, subject to liability under ERISA Sec. 406(a) for using plan assets for its own benefit. The trial court granted summary judgement to Great-West because the participants had not established that the company, as a non-fiduciary party in interest, knew or should have known that the transaction violated ERISA. By contrast, the appeals court affirmed the summary judgment, but on the grounds that the participants, by neglecting to identify the particular property in Great-West’s possession over which they could assert title or the right to possession, failed to satisfy a core element of an ERISA Sec. 502(a)(3) claim. Unless the profits the participants sought to recover were generated from a particular property over which they could assert title or possession, the court stressed, an order to disgorge profits would be a legal remedy that is not authorized under ERISA Sec. 502(a)(3).
SOURCE: Teets v. Great-West Life & Annuity Insurance Company (CA-10).
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