Article originally published on 5 September 2008.

In a first-of-its-kind victory for the financial services industry, a federal district court in Iowa has denied class certification in an ERISA class action suit that challenged so-called "revenue sharing" associated with retirement plans. Ruppert v. Principal Life Ins. Co.,No. 4:07-cv-0344-JAJ (S.D. Iowa Aug. 27, 2008). The case concerned whether "revenue sharing" payments from mutual funds violated the Employee Retirement Income Security Act of 1974 (ERISA).

Ruppert is symptomatic of many class actions that have been filed against 401(k) plan providers, claiming ERISA violations with respect to the receipt of revenue sharing payments from mutual funds. Ruppert is the first class certification ruling from these cases and, accordingly, its denial of class certification establishes precedent critical to other ERISA revenue sharing class actions. Sidley Austin LLP served as lead counsel representing Principal Life.

REVENUE SHARING AND ERISA CLASS ALLEGATIONS

Revenue sharing, in the context of 401(k) plans, involves agreements by mutual funds to make payments to 401(k) plan providers in exchange for services that are provided by the plan provider but would otherwise be performed by the mutual fund complex. Plan providers usually use these revenue sharing payments to offset costs that otherwise would be charged to plans directly as fees.

Even though the defendant credited back the revenue sharing to each plan to reduce fees and costs, the plaintiff in Ruppert alleged that such payments constituted "kickbacks" in violation of ERISA. As in other ERISA revenue sharing class actions, the complaint alleged breach of fiduciary duty under ERISA § 404(a)(1)(A), 29 U.S.C. § 1104(a)(1)(A), by failing to adequately disclose revenue sharing payments to participating plans. Plaintiff also alleged that such payments constituted "prohibited transactions" under ERISA §§ 406(b)(1) and (3), 29 U.S.C. §§ 1106(b)(1) and (3).

The plaintiff sought certification of a class consisting of "all retirement plans to which Principal was a service provider and for which Principal received and kept 'revenue sharing' kickbacks from mutual funds." Such a class, if certified, would have encompassed more than 25,000 active plans, as well as plans previously administered by the defendant, bringing the total to approximately 57,000 different retirement plans.

To view this document in its entirety please click here.

Sidley Austin LLP, a Delaware limited liability partnership which operates at the firm's offices other than Chicago, London, Hong Kong, and Sydney, is affiliated with other partnerships, including Sidley Austin LLP, an Illinois limited liability partnership (Chicago); Sidley Austin LLP, a separate Delaware limited liability partnership (London); Sidley Austin, a New York general partnership (Hong Kong); Sidley Austin, a Delaware general partnership of registered foreign lawyers restricted to practicing foreign law (Sydney); and Sidley Austin Nishikawa Foreign Law Joint Enterprise (Tokyo). The affiliated partnerships are referred to herein collectively as Sidley Austin, Sidley, or the firm.

This article has been prepared by Sidley Austin LLP for informational purposes only and does not constitute legal advice. This information is not intended to create, and receipt of it does not constitute, an attorney-client relationship. Readers should not act upon this without seeking professional counsel.