August 27, 2013 – Federal Judge in the U.S. District Court, District of New Jersey, rules that a retirement plan provider can be deemed an ERISA fiduciary with respect to the terms of its own compensation, even if those terms were negotiated prior to the retirement plan provider becoming a fiduciary.
Federal Judge in the U.S. District Court, District of New Jersey, rules that a retirement plan provider can be deemed an ERISA fiduciary with respect to the terms of its own compensation, even if those terms were negotiated prior to the retirement plan provider becoming a fiduciary.
NEW YORK, New York, August 27, 2013 – In a decision issued on February 19, 2013, the Honorable Dean D. Pregerson denied a motion to dismiss filed by defendants under Federal Rule Civil Procedure 12(b)(6) and decided the question of when fiduciary duties attach to a company that negotiates with an employer to provide services to a retirement plan under the Employee Retirement Income Security Act of 1974 (“ERISA”). The decision, which was issued in Santomenno, et. al. v. Transamerica Life Insurance Company, et. al., a matter currently pending in the District of New Jersey, is an important decision for plan participants and beneficiaries seeking to sue a retirement plan provider for charging excessive fees in violation of ERISA, because it broadens the scope of fiduciary liability.
ERISA provides a comprehensive federal scheme for the regulation of employee pension and welfare benefit plans offered by private-sector employers. ERISA contains various provisions intended to protect the rights of plan participants and beneficiaries in employee benefit plans. ERISA also regulates the responsibilities of plan fiduciaries and other issues regarding plan administration. ERISA sets fiduciary standards that require employee benefit plan funds be handled prudently and in the best interests of the participants. A person may also be considered a fiduciary based on the conduct and authority of the person. ERISA defines fiduciaries based on the functions that the person performs with respect to the plan. In particular, ERISA provides that a person is a fiduciary with respect to an employee benefit plan to the extent that the person exercises any discretionary authority or control with respect to management of the plan or the disposition of assets. 29 U.S.C. §1002 (21)(A). ERISA also states that an individual that renders investment advice to a plan for a fee or individuals that have discretionary authority or responsibility for administrating a plan are fiduciaries. 29 U.S.C. §1002 (21)(A).
Transamerica Life Insurance Company (“TLIC”) operates defined contribution plans (i.e., 401(k) plans) for employers, in which participants of these plans (referred to in the Santomenno Complaint as the “Plaintiff Plans”) invest their retirement savings. TLIC provides the Plaintiff Plans with investment options, each of which is referred to as a separate account investment option, in which participants of the Plaintiff Plans invest their retirement assets. Plaintiffs allege that, as a result of the range of services TLIC provided and its authority and control over plan assets, TLIC was a fiduciary to the Plaintiffs Plans, and that certain fees Plaintiffs paid through the separate account investment options violated ERISA §§ 404 and 406. Defendants argued that all Plaintiffs’ ERISA claims should be dismissed because there is not a sufficient nexus between Plaintiffs’ allegations of fiduciary status and their theories of liability. In particular, TLIC asserted that it does not act as a fiduciary with respect to the conduct alleged because it is the retirement plans’ sponsors, not TLIC, who caused the Plaintiff Plans to purchase TLIC’s services. TLIC further argued that it is not a fiduciary with respect to the terms of its own compensation because those terms were negotiated before it became a fiduciary. Defendants Transamerica Investment Management, LLC (“TIM”) and Transamerica Asset Management, Inc. (“TAM”) further argued that the relief sought against them is unavailable under ERISA.
In ruling against the Defendants, the Court held TLIC was a fiduciary with respect to its fees for several independent reasons. First, the Court found that TLIC’s fiduciary duties attached at the time it negotiated its fees, and therefore it was a fiduciary with respect to those fees. The Court rejected TLIC’s argument that it was not a fiduciary because its fees were set by contact before TLIC assumed its fiduciary responsibilities. Second, the Court found that TLIC retained sufficient discretion over its fees to make it a fiduciary with respect to those fees, by retaining the right to modify both its and the investment line-up. The Court also rejected TAM and TIM’s argument that the fees in their possession are not traceable because the fees that they received were paid out of mutual funds, and not plan assets. In particular, the Court held that “Plaintiffs allege that TIM and TAM knowingly participated in TLIC’s alleged self-dealing by withdrawing fees from the mutual fund or collective trust accounts into which TLIC’s separate accounts invested Plaintiffs’ retirement funds. The fees are allegedly in the current possession of TIM, TAM, or their successors.”
On April 25, 2013, Judge Pregerson also denied Defendants’ motion seeking to Amend the Court’s February 19, 2013 Order in Order to Certify for Interlocutory Appeal Pursuant to 28 U.S.C. § 1292 (b).
According to a class action attorney at Levy Konigsberg LLP, the February 19, 2013, ruling is an important decision for plan participants and beneficiaries, employers and plan sponsors because this ruling holds that a retirement plan provider can be deemed an ERISA fiduciary with respect to the terms of its own compensation, even if those terms were negotiated prior to the retirement plan provider becoming a fiduciary.
For more information about this class action, please contact LK’s class action attorneys at 1.212.605.6200.