Principal Prevails (Yet) Again in Fiduciary Suit

A case that hinged on the determination of fiduciary status based on control of plan assets—has been decided—again—in favor of the defendants. 

The original suit (Rozo v. Principal Life Ins. Co., S.D. Iowa, No. 4:14-cv-00463-JAJ-CFB, 5/12/17), was brought by plaintiff Frederick Rozo[1] on behalf of retirement plan participants who invested in Principal’s Principal Fixed Income Option (PFIO) plan, Rozo was invested in the PFIO through his employer-sponsored 401(k) plan from 2008 through 2013, while other members of the class participated through 401(a) and 457 plans (in addition to 401(k) plans). 

The suit alleged that: (1) Principal’s discretionary control of the CCR renders it a functional fiduciary over participants’ plan assets; and (2) Principal violated ERISA by retaining compensation (the margin) it was not entitled to as a fiduciary. In an amended complaint, Rozo had argued that even if Principal was not deemed to be a fiduciary, it might still be liable as a nonfiduciary “party in interest” providing services to an employee benefit plan.

Case History

There’s been a lot of miles travelled in this case. In September 2018, the district court granted summary judgment to Principal after concluding that it was not a fiduciary. Then in February 2020 this same appellate court reversed that decision, holding that Principal was a fiduciary, and remanded the case for further consideration back to the district court—which then (in April of 2021) entered judgment in favor of Principal on both claims after a bench trial. And then plaintiff Rozo (again) appealed that decision back to this court.

After reciting the history of the case,[2] the court (opinion written by Chief Judge Lavenski R. Smith, joined by Judges Steven M. Colloton and Bobby E. Shepherd) noted that following a bench trial, this court reviews legal conclusions “de novo” and factual findings for clear error—and that it would overturn a factual finding only “if it is not supported by substantial evidence in the record, if it is based on an erroneous view of the law, or if we are left with the definite and firm conviction that an error was made.”

Standard of Review

The court noted that in order to prevail on a claim of breach of fiduciary duty under ERISA, “the plaintiff must make a prima facie showing that a defendant acted as a fiduciary, breached his fiduciary duties, and thereby caused a loss to the [p]lan,” explaining that the issue in this case was whether there was, in fact, such a breach. In support of that argument, plaintiff Rozo makes two arguments; that the district court erred by holding that Principal did not breach its duty (that, at least in part, it acted in its own interests by increasing profits, and thus failed to act solely in participant interests), and second that the court clearly erred by finding that the deducts were reasonable and represented Principal’s reasonable expenses of administering the PFIO. In essence, that “if the fiduciary acts even ‘in part’ to further its own interests, it breaches its duty.”

After some discussion around various precedents involving the distinctions involving “sole” interests, the court noted that, “because there is a conflict of interest, we scrutinize Principal’s actions more closely, see id., and determine its state of mind when it set the PFIO’s CCR”—and then noted that the district court determined that Principal set the CCR according to a shared interest with participants—“to establish a CCR that will appropriately account for Principal’s risks and costs in offering the PFIO.”  Moreover, the court agreed that Principal and the participants share that interest because “a guaranteed CCR that is too high threatens the long-term sustainability of the guarantees of the PFIO, which is detrimental to ‘the interest of the participants.’”

Reasonable Amount

That said—and remembering that their purpose here was to determine if there had been “factual error” in the lower court’s decision, “We hold that the court did not clearly err in finding that the deducts, and thus the CCR, were set in participants’ interests.” And then went on to “…also hold that the court did not clearly err by finding that the deducts were reasonable and set by Principal in the participants’ interest of paying a reasonable amount for the PFIO’s administration. First, the court found that the RIS Risk Management deduct was reasonable and a reasonable expense in the participants’ interest.” And then after some discussion as to the methodology and refinement of that determination over time, distinguished its approach in operating with a profit objective in charging a reasonable fee from one that completely disregarded participant interests. “As our sister circuits have held, ‘ERISA does not create an exclusive duty to maximize pecuniary benefits.’”

It concluded “the court did not clearly err in finding that Principal set the deducts in the participants’ interest of paying a reasonable amount for the PFIO’s administration. It also did not clearly err in finding that the CCR was set in the participants’ interest. We accept both of these findings. Consequently, we hold that in setting the CCR, Principal was not “motivated by economic self-interest,” and that it did not either “place its own interests ahead of those of the [participants],” or “over the plan’s interest”—affirming the lower court’s judgment in favor of Principal on the disloyalty claim.

As for the claim regarding prohibited self-dealing (because it “generat[ed] revenue for itself from the plan contract”), the court held that “the district court did not clearly err in finding that the deducts—and thus the CCR—were reasonable. Its findings were supported by witness testimony it deemed credible. We hold that Principal has met its burden of establishing that its compensation was reasonable.” And then also affirmed the district court’s judgment in favor of Principal on the prohibited transaction claim “because it is exempted from liability for receiving reasonable compensation.”

What This Means

The case deals with a specific product configuration, but the discussion as to what/how control of plan assets, and how that might translate into fiduciary status is worth understanding. Indeed, there’s little question that the ability to control plan assets is a basic attribute of fiduciary status—but the difference between the Tenth Circuit’s decision in Teets (a case relied upon in both the district court’s decision and the appellate court’s review) and this case came down to the determination as to what constitutes control—at least in the eyes of the court.
 
Footnotes

[1] The plaintiffs in this case are represented by Stris & Maher LLP; Feinberg Jackson Worthman & Wasow LLP; Schneider Wallace Cottrell Konecky LLP; Shindler, Anderson, Goplerud & Weese PC; and Zelle LLP.

[2] In the words of the court, “Principal offers a 401(k) retirement plan—a Principal Fixed Income Option—which gives participants a guaranteed rate of return, the Composite Crediting Rate. Principal unilaterally calculates this CCR every six months. Before the CCR takes effect—typically a month in advance—Principal notifies plan sponsors, which alert the participants.  If a plan sponsor wants to reject the proposed CCR, it must withdraw its funds, facing two options: (1) pay a surrender charge of 5% or (2) give notice and wait 12 months. If a plan participant wishes to exit, he or she faces an “equity wash.” They can immediately withdraw their funds, but not reinvest in plans like the PFIO for three months. Rozo, a former plan participant, alleges that Principal’s setting of the CCR breaches its fiduciary duty and engages in prohibited transactions under ERISA. Both counts rely on Principal being a fiduciary. Alternatively, if Principal is not a fiduciary, Rozo pleads that Principal is engaging in prohibited transactions as a party in interest.