In a complicated case that a federal judge acknowledged “…presents interesting issues about what it means to be an ERISA fiduciary under the circumstances presented,” Principal Life once again fended off fiduciary claims regarding the operation of its PFIO offering.
A little more than a year ago, the Eighth Circuit disagreed (Rozo v. Principal Life Ins. Co., 8th Cir., No. 18-3310, 2/3/20) with the district court’s granting of summary judgment in favor of the defendants Principal Life in a case (Rozo v. Principal Life Ins. Co., S.D. Iowa, No. 4:14-cv-00463-JAJ) that had alleged on behalf of retirement plan participants who invested in Principal’s Principal Fixed Income Option (PFIO) plan that: (1) Principal’s discretionary control of the Composite Credit Rate (CCR) made 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, plaintiff Frederick 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. And because the appellate court felt that there were triable issues here (“Because the sponsor here is impeded, the participant’s ability to reject the CCR does not negate Principal’s fiduciary status”), the judges sent this back to the district court for “proceedings consistent with this opinion.”
However, following that decision, Principal appealed to the U.S. Supreme Court—but they demurred, sending the case back to the district court—and U.S. District Judge John A. Jarvey.
Well, in granting that original summary judgment, Judge Jarvey had held that Principal didn’t act as an ERISA fiduciary with respect to its ability to set the interest rate credited to the participants in its guaranteed investment funds, or as to its own compensation—and that, “If Principal is not a fiduciary, Counts I and II fail as a matter of law.” His rationale for that determination was that Principal announces the new rates in advance, allowing both plan sponsors—and ultimately plan participants—both time and the ability to “vote with their feet.”
The Case
Following a six-day trial, Judge Jarvey reserved ruling on the matter pending receipt of proposed findings of fact and conclusions of law—items that he wrote “…have now been received, and the matter is ready for disposition.”
The 45-page judgment by Judge Jarvey (who also authored the initial district court decision) is a complicated, thorough recitation not only of the product in question, but fiduciary duties and responsibilities. That said, on almost every issue presented, Judge Jarvey felt that the arguments and rationale presented by the defendants were more compelling.
For example, Plaintiff Rozo claims that Principal violated this fiduciary duty of loyalty because Principal did not set the CCR for the PFIO every six months to provide the maximum rate of return for plan participants, but Judge Jarvey determined that that was based solely on “whether Principal paid the maximum possible CCR, rather than measuring Principal’s actions in light of all the investment objectives of the PFIO,” and relied on “…a hindsight analysis of the deducts Principal made to determine the GIRs and, hence, the CCR, rather than on challenges to the actuarial predictions that Principal made when setting each GIR and the CCR…”
Judge Jarvey acknowledged that “there is no express definition of ‘the interest of the participants’ in ERISA or applicable case law, and there is scant case law that addresses ‘the interest of the participants’ in ways relevant to this case,” but that “Rozo’s narrow focus on the payment of the maximum possible CCR is undermined by the statute itself, because a participant also has an interest in payment of reasonable expenses of administering the plan. No plan could continue, if those expenses were not paid.
“Furthermore, the court finds that ‘the interest of the participants’ involves various investment characteristics of a fund, not just its rate of return.”
Conflicts of Interest?
Brushing aside arguments of a potential conflict of interest, Judge Jarvey acknowledged the interest of participants (including the plaintiff) in being able to invest in a stable, conservative, risk-free investment option—and in the need for profitability for a firm like Principal to provide that kind of option. “Rozo’s own behavior demonstrates that this is true, because following the great financial crisis of 2008, Rozo increased the percentage of his portfolio that was invested in the PFIO from 45% to 80%. He did so precisely for the reasons that the PFIO was offered—stability, preservation of principal, and guaranteed return—and because the PFIO outperformed all of his other investments,” Judge Jarvey wrote.
“This tension is permissible, not just for employers or plan sponsors, but also for entities that provide services to an ERISA plan, such as Principal,” he noted, going on to comment that “…the mere existence of a conflict of interest between a fiduciary and a participant generally is not enough to establish a breach of fiduciary duty claim,” and that Principal was not required to “seek advice from independent third parties in setting the CCR or to require Principal to surrender the task of setting the CCR to independent third parties to avoid a breach of fiduciary duty.”
He explained, “It is in both the participants’ and Principal’s interest to establish a CCR that will appropriately account for Principal’s risks and costs in offering the PFIO, not just so that the product can remain competitive in the market, but so that Principal can make good on its guarantees to participants. Participants do not simply want the best rate of return; they want the best rate of return they can get while taking essentially no risk and enjoying the safety and security of a soundly backed investment.”
Motivate ‘Ed’
One point that plaintiff Rozo did turn out to be persuasive was an argument that the focus of a disloyalty claim is on the fiduciary’s motivation. Principal had argued that the appropriate focus was process, and that motivation, while relevant, shouldn’t be the focus. Judge Jarvey determined that “…on the question of the focus of a disloyalty claim, Rozo has the better argument.” That said, he did not “…discount the proposition that a demonstrably reasonable process provides an inference that an ERISA fiduciary’s motive was to act in ‘the interest of the participants,’ while a demonstrably unreasonable process, or a process leading to a demonstrably unreasonable result, provides an inference that an ERISA fiduciary’s motive was to pursue its own interest, rather than ‘the interest of the participants.’”
Judge Jarvey noted that “managing risks is aligned with participants’ interests in a guaranteed return,” and that “…ensuring a rate of return on the capital that Principal sets aside to support the PFIO aligns with the participants’ interest in paying reasonable expenses of administering the fund.” Ultimately “…the court reiterates that Principal’s motivation was, indeed, to set the best rate that Principal could for participants while also appropriately accounting for Principal’s anticipated costs and risks, to ensure Principal could make good on its obligation to pay participants the PFIO’s guaranteed rate regardless of future market conditions.” He also found that the evidence “…establishes that the challenged deducts were set to address reasonable expenses of the plan, not for the purpose of enriching Principal at the participants’ expense. Thus, the court finds that Principal’s setting of the CCR was not dealing with the assets of the plan in Principal’s own interest or for its own account.”
Best Interests
Indeed, Judge Jarvey concluded that the overall operations of the fund were, ultimately, in participants’ best interests. “The evidence at trial demonstrated that these restrictions on participants’ reinvestment options upon withdrawal from the PFIO and on plan sponsors’ withdrawals from the PFIO benefit participants by reducing the risk of large, sudden cash outflows from the PFIO. The evidence also demonstrated that, without these restrictions, Principal could not offer a pooled guaranteed product with a rate as high and as stable as the PFIO.”
Judge Jarvey determined that “…the marketplace for pension fund investment options is huge and robust, as consumers such as Rozo have seemingly endless options for ways to save for retirement and provide income and growth. Within that market is another huge and robust marketplace for fixed income contracts such as the PFIO. Rozo himself demonstrated that the PFIO does not just compete against other fixed income pension products, but against other products available in a particular pension plan.
“Therefore, even if Rozo could establish self-dealing in violation of ERISA § 406(b)(1)—and the court found he could not—the court finds in Principal’s favor on its ‘reasonable compensation’ defense pursuant to ERISA § 408(c)(2) to that claim”—and “…in favor of Principal and against Rozo on Rozo’s claim of breach of the ERISA fiduciary duty to refrain from self-dealing in Count II of Rozo’s Complaint.”
What This Means
While the Eighth Circuit found the parameters and conditions of the PFIO to be a form of control sufficient to establish fiduciary status, Judge Jarvey clearly didn’t view that structure to be anything other than necessary to provide an investment product of value to participants and plan sponsors, and subject to the constraints of a robust and competitive marketplace. In that regard, it seemed there was no new ground(s) established for these considerations—and very little of the concerns expressed by the appellate court in those structures.
In sum, a fairly traditional interpretation of the boundaries of plan asset control in establishing fiduciary status—one in which thresholds and penalties which might limit, but don’t preclude choice, don’t create a problem.
- Log in to post comments