United States: The Debate Continues Over The Fiduciary Status Of 401(k) Plan Service Providers

In Golden Star Inc. v. MassMutual Life Ins. Co., 2014 WL 2117511 (D. Mass. May 20, 2014), a district court addressed two issues that have become hotly contested in 401(k) plan fee litigation: (1) whether and when a plan provider's possession or exercise of discretion over fees confers fiduciary status; and (2) whether, to be a fiduciary with respect to plan investments, a plan provider must not only possess, but actually exercise discretion over the investment options offered by the plan.

MassMutual offered plaintiff Golden Star (the plan sponsor and named fiduciary) recordkeeping and other services for its 401(K) plan. MassMutual defined the menu of investment options offered, and Golden Star selected the options to be offered in its plan from that menu. The mechanism for these investments was separate accounts owned by MassMutual as an insurer; MassMutual would pool the investments of several 401(K) plans investments into these separate accounts and then invest the accounts into mutual funds, or other selected investment options. The group annuity contract between Golden Star and MassMutual allowed MassMutual to assess management fees on the separate accounts of up to 1% of the market value.

MassMutual also collected revenue sharing payments made by the mutual funds for the investments from the separate accounts placed in their funds. Mutual funds that made these payments generally charged higher fees to cover the payments. MassMutual claimed that the revenue sharing payments offset fees and payments it would have otherwise collected from Golden Star's plan for the management of the separate accounts, but Golden Star claimed there was no dollar-for-dollar offset.

Regarding fiduciary status over setting fees, the district court found the record "impenetrable" on whether and how MassMutual charged fees on its separate accounts, and thus held there was a triable issue regarding whether MassMutual acted as a fiduciary in setting its own fees. The court distinguished between providers who negotiate compensation when the contract is first agreed to, versus a service provider who retains discretion in that contract to unilaterally adjust their compensation. The court stated that in the latter case, the control over compensation would make the service provider a fiduciary with respect to its compensation.

The court also determined that MassMutual was not a fiduciary with respect to fund selection because MassMutual never exercised its discretion to change the investment options offered by the plan. In support of that conclusion the court noted that the first prong used to determine fiduciary status provides that a party is a fiduciary "to the extent" it exercises discretionary authority or control over plan management, or exercises any authority or control over plan management. ERISA § 3(21)(A)(i).

The court noted that there was a substantial dispute over whether the reserved power to change plan investments makes a service provider a fiduciary under the "administration" prong of fiduciary status, which does not include "exercise," but simply states that a party is a fiduciary "to the extent" he or she "has" any discretionary authority or responsibility regarding plan administration. ERISA § 3(21)(A)(iii). The court thought it significant that subsection (iii) does not include management of plan assets, but noted there are cases that read the term "plan administration" broadly to include reserved powers over plan investments. The court concluded it did not need to decide this issue: since there was no evidence that MassMutual unilaterally substituted higher cost funds, the court held plaintiffs' claim failed the "to the extent" requirement, even if plan administration were construed broadly.

Proskauer's Perspective: MassMutual illustrates the current unsettled state of the law in this area, including how that law applies to various practices commonly followed by insurance providers to 401(k) plans. The U.S. Department of Labor ("DOL") is taking very aggressive positions in this area, including arguing in several cases that the ability to change plan investment options can make a provider a fiduciary, even if that power was never exercised. In negotiating and monitoring provider contracts, both providers and plan fiduciaries will thus want to carefully evaluate how provider compensation and fund selection is structured.

The Debate Continues Over The Fiduciary Status Of 401(k) Plan Service Providers

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