Alert September 29, 2014

Third Circuit Affirms Dismissal of Excessive Fee Claims Against Insurer

Summary

The Third Circuit has affirmed dismissal of all claims against the insurer in a 401(k) excessive fee suit, rejecting arguments that the insurer is an ERISA fiduciary for its product's fees, even where the service provider has the ability to make changes to its investment platform.

In Santomenno v. John Hancock Life Ins. Co., No. 13-3467 (3d Cir. Sept. 26, 2014), the U. S. Court of Appeals for the Third Circuit affirmed dismissal of all claims against the defendant insurance company in a case challenging 401(k) plan fees.

Background

The litigation was brought by participants in two 401(k) plans whose plan trustees purchased group annuity contract from the defendant insurer to provide 401(k) recordkeeping and investment options. The plaintiffs alleged that the insurer acted as an ERISA fiduciary and violated ERISA by charging excessive fees, including fund advisory fees, sales & service fees, 12b-1 fees, and revenue sharing. The plaintiffs asserted their claims on behalf of a purported class of all plans and participants who receive services under the insurer’s group annuity contracts. They also sued the insurer’s affiliated investment manager and fund distributors as non-fiduciaries who were allegedly liable for the fund fees.

District and Appeals Court Decisions

The U.S. District Court for the District of New Jersey dismissed the case, holding that the insurer did not act as a fiduciary under ERISA with respect to its fees or the investment options that plan trustees elect to make available to their plans. The Third Circuit affirmed. In a unanimous decision of the three-judge panel, the court held, among other things, that the insurer owes no fiduciary duty with respect to the terms of its service agreement so long as the plan trustees had the ultimate authority to accept or reject those terms. The court also held that the insurer is not a fiduciary with respect to the composition of its investment platform and the fees of those investments, which are merely product design features that trustees elect. In rejecting contrary authority, the court explained that “it is unnecessary to impose a fiduciary duty on the service provider.”

The court also rejected the plaintiffs’ argument that the insurer’s ability to delete or substitute funds from its investment platform rendered it a fiduciary. The court concluded that plaintiffs’ overall challenge to fees had no nexus to any change to investments on the platform, and that the trustees retained ultimate decision-making authority over their plans because they could accept or reject any changes that the insurer proposed to make to its investment platform. The court also rejected the plaintiffs’ allegations that the insurer rendered fiduciary investment advice, given that there was no nexus between such advice and the alleged harm, and plaintiffs’ failure to meet the elements set forth in the governing Department of Labor regulation concerning investment advice. 

Goodwin Procter represents the defendants-appellees in this case.