The U.S. District Court for the District of Massachusetts entered an order on cross summary judgment motions in one of the many cases challenging the use in group insurance benefit plans of retained asset accounts, denying the beneficiary’s motion and granting, in part, the insurer’s motion in Vander Luitgaren v. Sun Life Assurance Company of Canada, No. 09-11410, 2012 WL 5875526 (D. Mass. Nov. 19, 2012).
The litigation was brought by a beneficiary of a group life insurance plan whose sponsor had purchased group life insurance contracts from the insurer defendant. The insurer paid benefit claims under the group contract through interest-bearing accounts backed by funds that the insurer retained until the account holders wrote checks or drafts against the account. The plaintiff challenged the practice, which he claimed constituted a breach of fiduciary duty and a prohibited transaction under ERISA. The plaintiff purported to sue on behalf of a class of beneficiaries under contracts issued by the insurer defendant who had received their benefits through a retained asset account.
In 2011, the insurer’s motion to dismiss the complaint was denied because, among other reasons, the court found that the plaintiff had adequately alleged that the insurer was an ERISA fiduciary with respect to retained assets.
In its recent order, the court granted summary judgment to the insurer on the plaintiff’s prohibited transaction claim under ERISA § 406. The court found that nothing in the insurance contract suggested an ongoing property interest by the plan or participants in the insurer’s assets that back retained asset accounts. Accordingly, the assets were not ERISA-governed plan assets. In this regard, the court distinguished the First Circuit’s decision in Mogel v. Unum, 547 F.3d 23 (1st Cir. 2008), in which the appeals court held that sums due retained asset accountholders remained plan assets subject to ERISA fiduciary duties until “actual payment.” The Vander Luitgaren court stated that Mogel should not be interpreted to hold that assets held in an insurer’s general account – which are not plan assets – are “transformed into plan assets” once a defendant establishes a retained asset account. In rejecting the plaintiffs’ fiduciary self-dealing claim, the court held that, unlike in Mogel, where the insurance contract required payment by lump sum, the contract at issue in Vander Luitgaren did not. The insurer therefore discharged any fiduciary obligations that it had with respect to the management and disposition of plan assets when it set up the account.
With respect to the plaintiff’s claim for breach of fiduciary duties under ERISA § 404, the court denied the insurer’s motion for summary judgment. The court followed the First Circuit’s holding in Mogel that disposition of benefits to beneficiaries falls squarely within the insurer’s fiduciary responsibilities with respect to plan administration, holding that the insurer was acting as a fiduciary with respect to plan administration when it paid the plaintiff’s benefits claims. In particular, the court concluded that the insurer exercised discretionary fiduciary authority (i) in selecting to pay benefits via retained asset accounts; and (ii) in determining the crediting rates.
The court declined to decide the issue of whether the insurer breached its duty, noting that discovery was required to determine if the insurer was acting to optimize its own earnings when it established the retained asset accounts, and to determine if the interest rate that the insurer paid was competitive.