Key Takeaway: The Eighth Circuit agreed with the district court that a defendant can act loyally when its actions are motivated by an interest it shares with investors, even if in doing so it advances its own interests.
On September 2, 2022, the U.S. Court of Appeals for the Eighth Circuit affirmed the trial decision of the U.S. District Court for the Southern District of Iowa in favor of Principal Life Insurance Company (Principal) in a class action brought on behalf of individuals who had invested in the Principal Fixed Income Option (PFIO), a stable value product that Principal manages (Goodwin’s analysis of the district court decision can be found here). After a bench trial, the district court had rejected the plaintiff’s contention that Principal breached its duty of loyalty under ERISA when it set the PFIO’s rate of return in order to achieve profit objectives rather than to pay maximum returns. Instead, the court found that the interests of both Principal and PFIO investors were aligned because Principal set a reasonable rate of return that would result in a safe and secure investment product that provided guaranteed rates of return to the PFIO investors. The plaintiff appealed this ruling.
The Eighth Circuit affirmed the district court’s decision. On appeal, the plaintiff argued that the lower court’s holding was erroneous on the ground that ERISA’s duty of loyalty is violated by any action a fiduciary takes to advance its own interests, even if that action also advances the interests of the investors. The Eighth Circuit rejected this bright-line rule and instead agreed with the district court that a defendant can act loyally when it acts pursuant to a shared interest, even if that action also benefits itself. The court further agreed that Principal and the investors share an interest that the PFIO’s rate of return “appropriately account for Principal’s risks and costs in offering the PFIO . . . because a guaranteed [rate] that is too high threatens the long-term sustainability of the guarantees of the PFIO.”
This case is Rozo v. Principal Life Insurance Co., No. 21-2026, in the Eighth Circuit Court of Appeals. The decision is available here.