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Eighth Circuit: 401(k) Plan Service Provider Is a Fiduciary When Setting Guaranteed Rate of Return



Rozo v. Principal Life Ins. Co., 2020 WL 543378 (8th Cir. 2020)

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In this class action lawsuit, a former 401(k) plan participant sued a plan service provider claiming breach of ERISA’s fiduciary duty and prohibited transaction provisions in connection with the provider’s setting of the guaranteed rate of return on an investment option. The service provider sets the investment’s guaranteed rate every six months and communicates the new rate to plan sponsors (who notify participants) about a month before it takes effect. Plan sponsors wishing to reject the new rate have two choices: withdraw funds immediately subject to a 5% surrender charge, or give notice and withdraw funds after 12 months. Participants wishing to reject the new rate may withdraw funds immediately but are prohibited from investing in similar investment vehicles for three months. The trial court ruled in favor of the service provider—finding that it was neither a fiduciary nor a party in interest—and the participant appealed.

Noting the fundamental ERISA rule that a party is a fiduciary if it exercises discretionary authority or control over plan management, or exercises any authority or control regarding management or disposition of plan assets, the Eighth Circuit looked to a recent Tenth Circuit decision (see our Checkpoint article) to guide its analysis. Under that ruling’s two-part test, a service provider is not a fiduciary if it merely follows arm’s-length contractual terms, or if the plan and participants have an opportunity to reject the provider’s unilateral, discretionary actions regarding plan management or assets. With respect to the first prong, the service provider argued that it was merely following contractual terms when setting the rate, but the court disagreed, explaining that the service contract authorized the rate-setting but did not specify or otherwise control the rate. According to the court, an entity exercising discretionary authority may be a fiduciary even if the discretionary act is authorized by contract. As to the test’s second prong, the service provider similarly argued that plans and participants are not impeded from rejecting a new rate because the consequences for withdrawing funds are set forth in the contract. The court explained that it does not matter that the consequences are in the contract; the key issue is whether the rate can be freely rejected by the plan sponsor and plan participants when proposed. Here, the plan sponsor’s ability to reject a new rate was impeded. Because the service provider failed both prongs of the test, the court held that the service provider was a fiduciary, reversed the trial court’s decision, and sent the case back for further proceedings.

EBIA Comment: The outcome in this case is distinguishable from the Tenth Circuit’s decision—which held that the service provider in question was not a fiduciary—because the participants in that case failed to offer evidence showing that the provider’s restrictions were enforced, or were an unenforced (but actual) deterrent. This case identifies one set of actual, enforced restrictions that has triggered fiduciary status. Whether any lesser restrictions might be imposed without triggering fiduciary status remains to be seen. For more information, see EBIA’s 401(k) Plans manual at Sections XXIV.B (“Who Is an ERISA Fiduciary?”) and XXIV.L (“Prohibited Transactions”). See also EBIA’s ERISA Compliance manual at Section XXVIII (“Fiduciary Duties Under ERISA”).

Contributing Editors: EBIA Staff.

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