Investment Manager’s Motion to Dismiss Granted

Key Takeaway: The defendant, an insurance company and manager of target date separate account portfolios, successfully argued that it was not a fiduciary with respect to the fees it set for the separate accounts and the underlying investments in them because the plan sponsor had agreed to each during the party’s negotiations.

On March 28, 2022, the U.S. District Court for the Southern District of Iowa granted Principal Life Insurance Co.’s motion to dismiss in a case alleging that Principal breached ERISA fiduciary duties of prudence and loyalty by selecting and retaining underlying proprietary investments for the suite of target date separate account portfolios offered through the retirement plan in which plaintiffs participated. Specifically, plaintiffs alleged that Principal was motivated by its own pecuniary interested when it chose its own index funds as underlying investments for the investments, and did so even though the index funds charged higher fees and had larger tracking errors than market alternatives.
The Court granted Principal’s motion to dismiss, seemingly interpreting the plaintiffs’ core challenge as being one to the total fees charged by the investments and then finding that Principal was not acting as a fiduciary when setting those fees. In so doing, the Court relied on case law that has established that a plan service provider does not act as a fiduciary when negotiating the terms of its services and fees with the plan’s sponsor, so long as the service provider does not later exercise authority to increase its fees. Although the plaintiff argued that its challenge was not only to fees, but to the underlying investments in the target date funds as well, the Court similarly dismissed this challenge, reasoning that Principal was not a fiduciary with respect to the selection of investment options because which investment options would be offered had also been agreed to by the plan sponsor during its negotiations with Principal.
Th case is Kirk, et al. v. Principal Life Insurance Co., et al., No. 4:21-cv-00134, in the Southern District of Iowa. The decision is available here.