What Constitutes Control of Plan Assets?

A federal appellate court has adopted the fiduciary test established in another circuit – but has it come to a different conclusion?

 

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, 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.

In granting that summary judgment, Chief Judge John A. Jarvey of the U.S. District Court for the Southern District of Iowa 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.”

 

 

On appeal, the court considered the district court’s grant of summary judgment ‘viewing genuinely disputed facts “in the light most favorable to the nonmoving party.” They court went on to explain that “if the record taken as a whole could not lead a rational trier of fact to find for the nonmoving party, summary judgment should be granted.”

 

Explaining that the parties agree (as did this court) that a recent Tenth Circuit decision should guide this appeal – specifically Teets v. Great-West Life & Annuity Ins. Co., 921 F.3d 1200 (10th Cir. 2019). [i] In that case, the court 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 case was appealed to the U.S. Supreme Court, which declined to take up the issues). 

 

The court explained that at “Teets step one,” Principal’s setting of the CCR did not “conform[] to a specific term of its contract with the employer plan,” that every six months, Principal sets the CCR with no specific contract terms controlling the rate, and that Principal calculates the CCR based on past rates in combination with a new rate that it unilaterally inputs. The court goes on to explain that while “Principal asserts that it is acting pursuant to the contract because it authorizes Principal to set the CCR,” that assertion conflates two issues. The court notes that while the contract empowers Principal to set the CCR, the rate is not a “specific term[] of the contract.” Moreover, when Principal notifies a plan sponsor of the proposed CCR, the sponsor has not agreed to it – going on to explain that a service provider may be a fiduciary when it exercises discretionary authority, even if the contract authorizes it to take the discretionary act.

 

The court dismissed examples provided by the Principal defendants as distinguishable because “unlike the setting of the CCR here—the provider’s act was contractually predetermined.”

 

 

Perhaps more damning to the defendants’ case, the court noted that here “the plan sponsors here do not “have the unimpeded ability to reject the service provider’s action or terminate the relationship.” More simply, a plan sponsor that wishes to reject the CCR must leave the plan, with two options: (1) pay a 5% surrender charge or (2) have its funds remain in the plan for 12 months. “Charging a 5% fee on a plan’s assets impedes termination. Likewise, holding a plan’s funds for 12 months after it wishes to exit impedes termination.” The court concluded that “Principal, therefore, is a fiduciary exercising control and authority over the CCR.”

 

The court acknowledges counterpoints raised by the Principal defendants, specifically that the surrender penalty and delay are “not impediments because they are in the plan contract,” but called that argument “misplaced” because fiduciary status focuses on the act subject to complaint. “Because plan sponsors do not have an opportunity to agree to the CCR until after it is proposed, the CCR is a new contract term. This court, therefore, must decide if plan sponsors can freely reject the term,” noting that it does not matter that the barriers to rejecting the CCR are in the contract. 

 

The court also rejected the argument that enforcing the surrender charge at the time of exit is no different than having the plan sponsor pay an up-front charge for free exit later, explaining that “the critical inquiry here is the plan sponsor’s choice at the time it receives the proposed CCR. If impeded then, Principal exercises control.”

 

The court also distinguished the result in the Teets case (which found no fiduciary status), noting that while the investment vehicle involved is similar to the one here, differs in one critical respect; the Teets service provider had a “contractual option to impose a 12-month waiting period on plan withdrawal,” but never exercised it.”

 

Summing up their conclusions, the court explained that “Teets summarizes ERISA case law as finding fiduciary status if either a plan sponsor or a participant is impeded from rejecting the service provider’s act,, more specifically (citing the Teets case): “Fiduciary status turns on whether the service provider can force plans or participants to accept its choices about plan management or assets.” 

 

“Because the sponsor here is impeded, the participant’s ability to reject the CCR does not negate Principal’s fiduciary status,” they concluded, reversing the decision of the district court, and remanding it to that court for “proceedings consistent with this opinion.”

 

There’s little question that the ability to control plan assets is a basic attribute of fiduciary status. The difference between the Tenth Circuit’s decision in Teets and this case seems to be the determination as to what constitutes control. 

 

Now, if you find yourself unable to see much difference between the two situations – well, even this court acknowledges the similarities, and yet clearly finds a line that is arguably somewhat difficult to see (at least for this writer). That line seems to be that in the Teets case, the control wasn’t exercised, whereas in this case it was. One might well think that control is the ability to act, not just the act itself. But then, perhaps if the action hasn’t been taken, there is no injury to litigate.

 

Regardless, we’ll see what the district court does with the “new” direction. 

 

Thoughts? 

 

 

[i] The Teets suit was filed in 2015 by plaintiff John Teets, a participant in the Farmers’ Rice Cooperative 401(k) Savings Plan, which had contracted with Great-West for recordkeeping, administrative and investment services. The suit, which had been granted class action status on behalf of all plans and participants invested in the particular fund, alleged that Great-West (the defendant) acted as an ERISA fiduciary with respect to the fund because it exercised authority or control over the management of disposition of plan assets, specifically the Great-West Key Guaranteed Portfolio Fund, a fund that (as the court notes), “as the Fund’s full name suggests, is operated by Defendant.”

 

The appellate court there noted that “when plans and participants have a ‘meaningful opportunity’ to reject a service provider’s unilateral decision, courts have held the service provider is not a fiduciary,” and that in this case – while Great-West certainly exercised control in establishing the crediting rate, the “plan and/or its participants can ‘vote with their feet’ if they dislike the new rate,” even though there was a contractual provision that allowed Great-West to impose a waiting period of up to one year – because Great-West had never actually imposed that restriction, and thus the argument was found to be “speculative.”