Rozo v. Principal Life Ins. Co., 2022 WL 4005339 (8th Cir. 2022)
Available at https://ecf.ca8.uscourts.gov/opndir/22/09/212026P.pdf
A 401(k) plan participant brought a class action against a life insurance company, claiming a breach of ERISA’s fiduciary duty of loyalty and prohibited transaction provisions in connection with the insurer’s setting of the guaranteed rate of return on a stable value contract investment option. The trial court ruled for the insurer, determining that it was not a fiduciary. The Eighth Circuit reversed, concluding that the insurer was a fiduciary because it unilaterally set the rate of return on the investment option, and remanded the case for further proceedings (see our Checkpoint article). On remand, the trial court ruled that there was no breach of loyalty where the insurer received reasonable compensation for setting a composite crediting rate that (1) appropriately accounted for its risks and costs, (2) made the investment options more competitive, and (3) allowed the insurer to fulfill its guarantees to plan participants. The trial court also concluded that no prohibited transaction occurred because the insurer’s setting of the rate at which participants earned interest was not “dealing with the assets of the plan in [its] own interest or for its own account.” The trial court added that even if there was self-dealing, there was no prohibited transaction because the insurer received reasonable compensation for services rendered.
On review, the Eighth Circuit agreed. Explaining that under ERISA’s duty of loyalty, a fiduciary must discharge duties with respect to a plan solely in the interest of the participants, the Eighth Circuit noted that it had not set forth factors for determining whether fiduciaries acted solely in participants’ interests and would look to guidance from other courts. Because the insurance company was compensated for any positive spread between what it promised to credit to participants and what its investments yielded, the Eighth Circuit concluded that there was tension between the interests of participants and the insurance company. The court concluded, however, that the mere existence of this tension does not result automatically in a breach of the duty of loyalty. There was ample evidence showing that the insurer’s actuaries had tried to set the best rate for participants while also accounting for the insurer’s own anticipated costs and risks so it could fulfill its obligation to pay participants the guaranteed rate. There was also substantial evidence that the calculated target return rate of the insurer’s own funds set aside to back the investment option was a reasonable expense. In addition, the court held that, although the insurer engaged in self-dealing, it was shielded from liability by the reasonable-expense exemption because the amounts it received were reasonable and not the result of inflationary tactics.
EBIA Comment: Despite the existence of a conflict of interest, the Eighth Circuit concluded that there was no breach of the duty of loyalty where the insurer was not motivated by economic self-interest and did not place its own interests ahead of those of the participants or the plan. Thus, in the Eighth Circuit at least, if a fiduciary insurer can show that the interest rate for fixed-income investments is set according to a shared interest with participants, and appropriately accounts for its risks and costs in offering the investment, there should be no breach of the duty of loyalty. 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.
