By Pension and Benefits Editorial Staff
Reversing and remanding a federal district court’s ruling, the U.S. Court of Appeals in St. Louis (CA-8) held that Principal Life Insurance is a fiduciary when it sets the rate of return for its 401(k) plan stable value investment option. Applying the test established by the Tenth Circuit in Teets v. Great-West Life & Annuity Ins. Co., the Eighth Circuit determined that Principal’s rate setting did not conform to a specific term of its contract with the employer plan and the plan sponsor did not have the “unimpeded ability” to reject Principal’s actions.
Investment option. Principal offered a 401(k) retirement plan investment option—the Principal Fixed Income Option—which provided its participants with a guaranteed rate of return called the Composite Crediting Rate (CCR). Every six months, Principal unilaterally calculates the CCR and provides plan sponsors with one month notice before the CCR takes effect. If a plan sponsor wants to reject the proposed CCR, it must withdraw its funds from the plan and either pay a 5% surrender charge or give notice and leave the funds in the plan for 12 months.
The plaintiff, a former plan participant who invested in the Principal Fixed Income Option, filed suit alleging that Principal’s setting of the CCR breached its fiduciary duty and engaged in prohibited transactions in violation of ERISA. The district court granted Principal’s motion for summary judgment, finding that it was not a fiduciary.
Service provider or fiduciary? Under ERISA Sec. 3(21)(A), a plan fiduciary is one who “exercises any discretionary authority or discretionary control respecting management of such plan or exercises any authority or control respecting management or disposition of its assets.” In a recent decision, Teets v. Great-West Life & Annuity Ins. Co., the Tenth Circuit held that a service provider acts as a fiduciary if: (1) it “did not merely follow a specific contractual term set in an arm’s-length negotiation,” and (2) it “took a unilateral action respecting plan management or assets without the plan or its participants having an opportunity to reject its decision.” The Eighth Circuit held that the Teets analysis controlled here.
Principal set the CCR every six months and it did not conform to any specific term of its contract with the employer. Principal argued that it acted in accordance with the contract because the contract authorized Principal to set the CCR. The court concluded that even though the contract provided Principal with discretion to set the CCR, the rate itself is not a specific term of the contract. Thus, Principal’s setting of CCR does not conform to a specific term of the contract because the rate itself is within Principal’s discretion.
The court found that because of the 5% surrender charge and 12-month hold, the plan sponsors did not “have the unimpeded ability to reject the service provider’s action or terminate the relationship.” Thus, Principal was a fiduciary exercising control over the CCR.
Principal argued that the surrender penalty and delay are not impediments to rejection because they are in the plan contract. The court rejected this argument noting that “[f]iduciary status focuses on the act subject to complaint.” Here, the participant complained about the setting of the CCR. Under the terms of the contract, the plan sponsor does not have an opportunity to agree to the CCR until after it is proposed, thus CCR is a new contract term. Thus, the court must determine if the sponsor may freely reject this new term, regardless of what is in the contract.
Distinguishable from Teets. In Teets, the court found that the service provider was not a fiduciary, and Principal argued that the court here should have followed that ruling. The court noted that a key fact that distinguished Teets was that the service provider had an option to impose a 12-month waiting period on plan withdrawal, but never exercised it.
Lastly, the court rejected the argument that the participant’s ability to freely reject the CCR precludes a finding of fiduciary status. Under ERISA case law, a finding of fiduciary status is proper if either a plan sponsor or a plan participant is impeded from rejecting a service provider action. The court has already found here that the sponsor was impeded, so the participant’s ability to reject the CCR was inconsequential.
Source: Rozo v. Principal Life Insurance Company (CA-8).
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