Investment Platform Provider Not Acting as a Fiduciary When Collecting Access Fees From Mutual Funds

An appellate court has affirmed the dismissal of a class action lawsuit alleging that a retirement plan service provider breached its fiduciary duties when it charged some mutual funds access fees to be included on the provider’s investment platform. The provider, which serves as the recordkeeper and directed trustee for thousands of 401(k) plans, offers a “supermarket” of funds (the Big Menu) from which each plan’s fiduciaries can select investment options (the Small Menu). Some funds must pay an access fee to be included on the Big Menu. In this lawsuit, participants alleged that the provider acts as a fiduciary because it (1) increases its compensation by collecting the access fees; (2) selects the funds available on the Big Menu, which indirectly determines the funds on the Small Menu; and (3) pools plan investments in an omnibus account mechanism. The trial court rejected these arguments (see our Checkpoint article), and the participants appealed.

The appellate court acknowledged that the provider, as a directed trustee, has some fiduciary duties. But the court also observed that fiduciary status is not an all-or-nothing proposition, and held that the provider’s fiduciary duties do not extend to the access fees. According to the court, charging access fees does not translate to control over the compensation paid by participants due to a series of intervening and independent decisions outside of the provider’s control. The funds separately negotiate their access fees with the provider and decide whether to pass the access fees through to investors, such as the participants; fiduciaries decide which funds to include on the Small Menu; and participants decide whether to invest in the available funds. Addressing the claim that the provider’s control over the composition of the Big Menu makes it a fiduciary, the court observed that cases “almost directly on point” reject this argument (see our Checkpoint article) and hold that service providers are not ERISA fiduciaries simply because they offer a menu of investment options without giving investment advice. Finally, in response to the participants’ argument regarding the omnibus account mechanism, the court observed that the provider can charge access fees because it has many customers, not because it has control over its customers or their assets in a meaningful way.

EBIA Comment: This decision adds to a growing list of cases in which courts have declined to deem a service provider a fiduciary in connection with its creation and operation of an investment platform. Because functional fiduciary status is determined by the facts and circumstances, however, providers must be careful about structuring and documenting their arrangements. For example, as the court noted here, a platform provider’s fund selection decisions might make it a fiduciary if other fiduciaries do not retain final authority regarding the investment options available to participants. For more information, see EBIA’s 401(k) Plans manual at Sections XXIV.B (“Who Is an ERISA Fiduciary?”) and XXV.F (“Investment Fees and Expenses”).

Contributing Editors: EBIA Staff.