In Teets v. Great-West Life & Annuity Insurance Company, Case No. 14-2330 (D. Col. May 22, 2015), the U.S. District Court for the District of Colorado denied in part and granted in part a motion to dismiss claims under ERISA challenging the offering of an insurance company’s guaranteed investment contract (the “Fund”) as an investment option to 401(k) plan investors.
The plaintiff, a participant in a plan that offered the Fund, brought suit on behalf of a purported class of all participants and beneficiaries of defined contribution plans invested in the Fund. The plaintiff alleged that the defendant acted as an ERISA fiduciary to the plans with respect to the Fund because it exercised authority or control over the management of disposition of plan assets, including the Fund. The plaintiff asserted three claims: First, the plaintiff alleged that the defendant breached fiduciary duties by setting the Fund’s interest rate artificially low and charging excessive fees in order to increase its own profits. Second, the plaintiff alleged that the defendant engaged in prohibited fiduciary self-dealing by dealing with the Fund for its own interest and for its own account. Third, the plaintiff alleged that the defendant, as a fiduciary of the plans, caused the plans to be entered into a contractual arrangement with the defendant under which the defendant also acted as a party in interest with respect to the plan, and that the defendant received unreasonable compensation in violation of ERISA’s rules governing party in interest transactions.
The defendant moved to dismiss the complaint on the grounds that (i) the Fund falls under the guaranteed benefit policy exemption to ERISA’s plan asset rule, and the defendant’s control over the Fund does not give rise to fiduciary status; and (ii) the plaintiff’s party-in-interest prohibited transaction claims fails because they are "predicated on the same party – defendant – in the roles of both the fiduciary and the party in interest."
The court denied the first ground for dismissal, holding that the guaranteed benefit policy exemption does not apply. In so ruling, the court stated that the exemption only applies where the investment contract allocates investment risk to the insurer and provides a “genuine guarantee of an aggregate amount of benefits.” The court cited Supreme Court authority in John Hancock Mut. Life Ins. Co. v. Harris Trust & Sav. Bank, 510 U.S. 86 (1993) as stating that if the participant bears the risk and the participant benefits can fall to zero, then the guaranteed benefit policy exemption does not apply. Because the Fund’s contract guaranteed a minimum interest rate of 0%, the court held that it could not definitively conclude at this stage of the case that the exemption applied.
The court granted the second ground for dismissal, agreeing with the defendant that the plaintiff could not maintain a prohibited transaction claim on the theory that the defendant was both the fiduciary and the party in interest to the transaction because such claim was duplicative of the plaintiff’s fiduciary self-dealing claim. The court permitted the plaintiff leave to amend the complaint, and an amended complaint was filed on June 16, 2015 that purports to assert a prohibited transaction claim on the theory that the defendant knowingly caused the plans to enter into prohibited party-in-interest transactions.