Alert June 27, 2013

In Leimkuehler, Seventh Circuit Affirms Judgment for Insurer in Challenge to Use of Separate Accounts in 401(k) Platform

Summary

Creating and offering a menu of funds to retirement plan trustees does not confer ERISA fiduciary status, according to a decision by the Seventh Circuit. The court held that ERISA's fiduciary status analysis is not altered by an insurer establishing separate accounts to hold specified mutual funds. And while an insurer can, in certain circumstances, be an ERISA fiduciary with respect to the operation of separate accounts, the court said, it is only liable if the accounts are mismanaged.

In Leimkuehler v. Am. United Life Ins. Co., Nos. 12-1081, 12-1213, & 12-2536 (Apr. 16, 2013), the Seventh Circuit affirmed dismissal, on summary judgment, of all claims against an insurer concerning the investment options offered to a retirement plan on a platform structured through separate accounts within group annuity contracts sold to the plan’s trustees.

Background

The trustee of a 401(k) plan sued the insurer providing investment and recordkeeping services to the plan through a group variable annuity contract. Suit was brought on behalf of the plan and a purported class of all other plans that purchased the insurer’s variable group annuity product. The trustee claimed that the insurer breached its alleged ERISA fiduciary duty and committed a prohibited transaction by establishing and operating the platform and receiving revenue sharing payments from mutual funds (or affiliates of the funds) held in separate accounts and made available to the insurer’s customers through its group variable annuity contracts under the platform.

District Court Decision in Leimkuehler

The U.S. District Court for the District of Indiana granted the insurer summary judgment on the claims, holding that the insurer was not acting as a fiduciary under ERISA in establishing and operating the platform through which it received revenue sharing. The Seventh Circuit affirmed the judgment of the district court and held that an insurer was not acting as an ERISA fiduciary in structuring the platform and could therefore not be liable for breach of ERISA fiduciary duty or prohibited transactions in receiving the revenue sharing payments.

ERISA Fiduciary Status

The Seventh Circuit confirmed that the creation of a menu of funds as part of a product offering to retirement plan trustees does not give rise to ERISA fiduciary status. It also expressly held that ERISA’s fiduciary status analysis is not altered merely because the insurer established and maintained separate accounts to hold specified mutual funds.

While an insurer may be an ERISA fiduciary as to the actual operation of such separate accounts, the court held that it can only be liable if it "mismanaged the separate account—say, by losing track of participants’ contributions or withdrawing funds in the separate account to pay for a company-wide vacation to Las Vegas."

The court also expressly rejected arguments made in an amicus curiae brief submitted by the Department of Labor, and held that an insurer's contractual ability to substitute funds did not give rise to fiduciary status with respect to all of the investments that the insurer includes on its product platform.