Retirement plan sponsors that have agreements with service providers should be aware of a recent appellate court decision that absolved such providers of fiduciary duty — if a plan trustee exercised final control over the terms of their agreement.
Background
In Santomenno v. John Hancock Life Insurance Co., 2014 WL 4783665 (3rd Cir. Sept. 26, 2014) — one of several long-running “excessive fee” cases in which 401(k) plan participants allege that their employer-sponsored retirement plans charged too much for plan or investment services — the plaintiffs claimed that John Hancock Life Insurance assessed duplicative fees for management of annuity contracts offered by their respective employer plans.
In its ruling Sept. 29, the 3rd U.S. Circuit Court of Appeals affirmed an earlier district court decision (see October 2012 story) on a motion to dismiss by the service provider that found John Hancock was not a fiduciary when it came to the alleged ERISA breaches because, in the end, the plan trustees had final authority over the terms of the service agreements that set the fees charged.
In the appellate case, the judges noted the “threshold question” was not whether John Hancock was a fiduciary, but rather whether it was “acting as a fiduciary (that is, performing a fiduciary function) when taking the action subject to complaint.” The plaintiffs, who took the case on appeal to the 3rd Circuit, claimed both that the fees assessed on their accounts were duplicative, and therefore excessive, and that some fees indicated for other service providers in fact went to John Hancock.
The appellate judges aimed to determine whether John Hancock was a fiduciary in either instance.
Industry Analysis
In the end, the court found that “a service provider owes no fiduciary duty to a plan with respect to the terms of its service agreement if the plan trustee exercised final authority in deciding whether to accept or reject those terms,” according to ERISA attorney Patrick DiCarlo, writing Sept. 29 in Alston & Bird law firm’s ERISAinBrief blog.
So don’t blame the service provider, at least in this case. “[I]f the service provider is granted the authority to change around investments that end up paying itself more than a reasonable amount, it isn’t required to refund any amount and act in the plan’s best interest,” according to Katherine Brown, a research associate for Castle Rock Investment Co., posting Oct. 8 on that firm’s blog. “Excessive fees happened in this case because the plan sponsor’s irresponsibly allowed the service provider too much autonomy over the plan and too little liability to balance it out.”
To read the complete story on Thompson’s HR Compliance Expert, click here.