Participants Failed to Show That Fund Manager’s Discretion Made It a Fiduciary

In this class action, a 401(k) plan participant sued an investment fund manager, claiming that the manager is an ERISA fiduciary that breached its duties by setting a low crediting rate for its stable-value fund to increase its own compensation. Amounts invested in the fund earn interest at a rate set quarterly by the manager with at least two business days’ notice (the “credited rate”). The manager invests contributions in its general account and retains, as compensation, the difference between the credited rate and its actual earnings. Participants may withdraw from the fund at any time, but plans are prohibited from offering participants any other stable-value fund. Also, the manager reserves the right to impose a waiting period of up to 12 months on any plan wishing to terminate its relationship based on changes to the credited rate. The lawsuit, potentially affecting 270,000 participants in multiple plans, alleged breach of the manager’s fiduciary duty under ERISA and violation of the prohibited transaction rules. The manager denied that it was a fiduciary and argued that the relief requested for the alleged prohibited transaction was unavailable under ERISA. The trial court ruled in favor of the manager and dismissed the claims.

Upholding the ruling on appeal, the Tenth Circuit explained that a service provider is not a fiduciary when merely following contractual terms set in arm’s-length negotiations, and that unilateral action regarding plan management or assets does not trigger fiduciary status if the plan or participants have a meaningful opportunity to reject that action. If the service provider does not have final decisionmaking authority, it is not a fiduciary (see, for example, our Checkpoint article). The court then rejected the argument that the manager exercised sufficient authority over plan assets (the investment contract) to make it a fiduciary because there was no evidence that participants were unable to effectively “veto” the rate by withdrawing amounts from the fund. Regarding the claim that fiduciary status arose due to the manager’s control over its own compensation, the court concluded that the lack of evidence of control over the credited rate meant there was also no evidence the manager controlled its own compensation—which ultimately depended on participants electing to keep their money in the stable-value fund. The court refused to consider the potential effect of the 12-month waiting period because the manager had never imposed it, and no evidence was offered to show that the waiting period’s possible application had any effect. Absent evidence that either plans or participants were deterred from exiting the fund, the manager could not be deemed a fiduciary.

Turning to the prohibited transaction claim, the court explained that any violation would permit only equitable relief. Recovery of money damages may be characterized as equitable only if the funds sought are specifically identifiable or traceable to the alleged wrongful profits (see, for example, our Checkpoint article). The court determined that the participant failed to identify any specific property from which equitable relief would be available, thus there was no possible remedy for any prohibited transaction.

EBIA Comment: Common sense suggests that having little advance notice of changes in a fund’s credited rate and no comparable investment alternative might diminish participants’ freedom to “veto” rate changes by withdrawing from the fund. But surviving a motion for summary judgment requires more than common sense: It requires evidence, and here the participants offered none. So while it might be tempting to read this case as a determination that investment limitations like those present here don’t grant sufficient discretionary authority to make an investment manager a fiduciary, that wasn’t the court’s conclusion. The court did not need to decide how much of an obstacle those limitations could be without making the manager a fiduciary because the participants failed to offer any evidence that those factors were an obstacle at all. As a result, the important line-drawing questions about fiduciary status raised by this case will have to wait for another day. For more information, see EBIA’s 401(k) Plans manual at Sections XXIV.B (“Who Is an ERISA Fiduciary?”), XXIV.L (“Prohibited Transactions”), and XXV.F (“Investment Fees and Expenses”). See also EBIA’s ERISA Compliance manual at Section XXVIII (“Fiduciary Duties Under ERISA”).

Contributing Editors: EBIA Staff.