A case that hinged on the determination of fiduciary status based on control of plan assets was decided, again, in favor of the defendants.
The original costume (Rozo c. Principal Life Ins. Co., SD Iowa, #4:14-cv-00463-JAJ-CFB, 5/12/17), was brought by plaintiff Frederick Rozo[i] On behalf of pension plan participants who invested in Principal’s Fixed Income Option (PFIO) plan, Rozo was invested in the PFIO through his employer-sponsored 401(k) plan from 2008 to 2013, while other members of the class participated through 401(a) and 457 plans (in addition to 401(k) plans).
The lawsuit alleged that: (1) Principal’s discretionary control over CCR makes it a functional trustee of participants’ plan assets; and (2) principal violated ERISA by retaining compensation (margin) to which he was not entitled as a fiduciary. In an amended complaint, Rozo had argued that even if Principal was not considered a fiduciary, he could still be liable as a non-fiduciary “interested party” providing services to a benefits plan.
There were a lot of miles traveled in this case. In September 2018, the district court granted summary judgment to Principal after finding he was not a trustee. Then, in February 2020, that same appellate court reversed that decision, finding that the principal was a trustee, and sent the case back for further consideration to the district court – which then (in April 2021) returned a judgment in favor of the principal on both claims after a bench test. And then plaintiff Rozo (again) appealed that decision to this court.
After reciting the story of the case,[ii] the court (opinion written by Chief Justice Lavenski R. Smith, joined by Justices Steven M. Colloton and Bobby E. Shepherd) noted that following a bench trial, this court is reviewing legal findings” de novo” and findings of fact for manifest error – and that it would only reverse a finding of fact “if it is not supported by substantial evidence on the record, if it is based on an erroneous view of the right or if we have the firm conviction that an error has been made. ”
The court noted that to prevail over an allegation of breach of fiduciary duty under ERISA, “the plaintiff must establish a prima facie case showing that a defendant acted as a fiduciary, breached its fiduciary obligations and thus caused a loss to the [p]lan”, explaining that the question in this case was whether there had in fact been such a violation. In support of this argument, the plaintiff Rozo puts forward two arguments; that the district court erred in finding that the principal did not breach his duty (that at least in part he acted in his own interest by increasing profits, and therefore did not act solely in the interest of the participants), and secondly that the court clearly erred in finding that the deductions were reasonable and represented the Principal’s reasonable expenses for the administration of the PFIO. Essentially, that “if the fiduciary acts even ‘in part’ to further its own interests, it is in breach of duty.”
After some discussion around various precedents involving the distinctions involving interests “alone”, the court noted that, “because there is a conflict of interest, we are looking more closely at the principal’s actions, see id., and determine his state of mind when setting the CCR of the PFIO” – and then noted that the district court determined that the principal established the CCR based on a shared interest with the participants – “to establish a CCR that will appropriately account for Principal’s risks and costs in the PFIO’s offer.” In addition, the court agreed that Principal and the participants share this interest because “an excessively high guaranteed CCR threatens the durability of the guarantees of the PFIO, which is detrimental to ‘the interest of the participants'”.
That said, and remembering that their purpose here was to determine whether there had been a “factual error” in the lower court’s decision, “We find that the court did not manifestly err in concluding that the deductions, and therefore the CCR, have been established in the interests of the participants. And then went on to “…also held that the court did not clearly err in finding that the deductions were reasonable and fixed by the principal in the interests of the participants to pay a reasonable amount for the administration of the PFIO. First, the court found that the RIS Risk Management deduction was reasonable and a reasonable expense in the interest of the participants. And then, after some discussion of methodology and refining that determination over time, distinguished its approach of operating with a profit motive by charging a reasonable fee from an approach that completely ignored the interests of the participants. “As our sister circuits have argued, ‘ERISA does not create an exclusive obligation to maximize pecuniary benefits.'”
He concluded that “the court clearly did not err in finding that the principal fixed the deductions in the interests of the participants to pay a reasonable amount for the administration of the PFIO. Nor did it manifestly err in concluding that the CCR was established in the interests of the participants. We accept both conclusions. Therefore, we find that in setting the CCR, the Principal was not “motivated by his own economic interest” nor did he “put his own interests ahead of those of the [participants]or “on the interest of the plan” – affirming the lower court’s judgment in favor of Principal on the allegation of disloyalty.
As for the allegation concerning prohibited transactions for own account (because they “generate[ed] income for itself from the plan contract”), the court held that “the district court clearly did not err in finding that the deductions – and therefore the CCR – were reasonable. His conclusions were supported by testimonies deemed credible. We believe that Principal has discharged his burden of establishing that his compensation was reasonable. And then also upheld the district court’s judgment in favor of principal on the prohibited transaction claim “because he is exempt from liability to receive reasonable compensation.”
What does that mean
The case deals with a specific product setup, but the discussion of control over plan assets and how that might translate to fiduciary status is worth understanding. Indeed, there is no doubt that the ability to control plan assets is a fundamental attribute of fiduciary status, but the difference between the Tenth Circuit’s decision in The teeth (a case cited in both the district court’s decision and the appellate court’s review) and that case came down to determining what constitutes control, at least in the eyes of the court.
[i] The plaintiffs in this case are represented by Stris & Maher LLP; Feinberg Jackson Worthman & Wasow LLP; Schneider Wallace Cottrell Konecky LLP; Shindler, Anderson, Goplerud and Weese PC; and Zelle LLP.
[ii] In the words of the court, “Principal offers a 401(k) retirement plan – a fixed income option of Principal—which gives participants a guaranteed rate of return, the composite deposit rate. The principal unilaterally calculates this CCR every six months. Before the CCR takes effect, usually a month in advance, the principal notifies the plan sponsors, who alert the participants. If a plan sponsor wants to reject the proposed CCR, they must withdraw their funds, facing two options: (1) pay a 5% surrender charge or (2) give notice and wait 12 months. If a plan participant wishes to opt out, they face an “equity cleanup”. They can immediately withdraw their funds, but not reinvest in plans like the PFIO for three months. Rozo, a former plan participant, alleges that Principal’s establishment of CCR breaches his fiduciary duty and engages in prohibited transactions under ERISA. Both counts are based on Principal being a fiduciary. Alternatively, if Principal is not a fiduciary, Rozo is arguing that Principal is engaging in prohibited transactions as a self-interested party.