Courts have long struggled to set the boundaries at which point ERISA plan service providers exert sufficient control and discretion over plan assets to make them fiduciaries under ERISA 3(21). The significance of being an ERISA fiduciary is self-evident in the litigation context: if an entity is not an ERISA fiduciary, then it cannot be liable for a breach of ERISA’s fiduciary duties and self-dealing prohibited transaction rules.
ERISA 3(21) states that a person or entity functions as a fiduciary to the extent he or she (1) exercises any discretionary authority or discretionary control with respect to management of the plan, (2) exercises any authority or control regarding management or disposition of plan assets, (3) renders investment advice for a fee or compensation, or (4) otherwise possesses any discretionary authority or responsibility in plan administration. While these guidelines concerning ERISA fiduciary conduct seem straightforward enough, judicial applications are highly fact intensive and are without the benefit of bright line rules.
Take for example, the discrete issue of whether service providers that set fixed interest rates for ERISA plan investments are fiduciaries. In a very recent decision, the Eighth Circuit in Rozo v. Principal Life Insurance Co. determined that a plan servicer provider – in setting a fixed rate of return for a defined contribution plan – was a fiduciary; however, less than a year earlier, the Tenth Circuit, under very similar facts in Teets v. Great-West Life & Annuity Ins. Co., applied the same test, but came to the opposite conclusion.
What gives?
In Rozo, the Eighth Circuit attempted to distill the core fiduciary functions of discretion and control under ERISA 3(21). Rozo involved a retirement product called the “Principal Fixed Income Option” that Principal provided to plan sponsors and their participants through a group annuity contract. The Fixed Income Option set a guaranteed rate of investment return – coined as the composite crediting rate (“CCR”). Before the Eighth Circuit, was the issue of whether Principal, as a service provider to 401(k) plans, functioned as a fiduciary in unilaterally calculating the CCR every six months. Under the terms of the group annuity contract, before the new CCR took effect, plan sponsors were required to notify participants who could then withdraw from the Fixed Income Option.
The Eighth Circuit applied the same test employed by the Tenth Circuit in Teets v. Great-West Life & Annuity Ins. Co. to determine whether Principal acted as a fiduciary in setting the CCR. The Teets rule attempted to crystalize several different court decisions in setting a two-part inquiry that a service provider functions as a fiduciary: if (1) it did not merely follow a specific contractual term set in an arm’s-length negotiation, and (2) it took a unilateral action respecting plan management or assets without the plan or its participants having an opportunity to reject its decision.
In extending the Teets test to Principal’s conduct, the Eighth Circuit found Principal to be a fiduciary because (1) in setting the CCR, it exercised discretionary authority in deciding the rate itself (the rate itself was not a specific term of the contract), and (2) the plan sponsors did not have the “unimpeded” ability to reject the CCR. Prong two of the Teets rule proved to be most determinative to the result. While the District Court found that the plan and its participants could reject the service provider’s decision, the Eighth Circuit did not. The Eighth Circuit reasoned that because plan sponsors only had two options if they wished to reject the CCR: (1) pay a 5% surrender charge, or (2) have their funds remain in the plan for 12 months, this would significantly impede termination and withdrawal.
While Principal tried to analogize the surrender charge to the plan sponsors’ paying an up-front charge for a “free” exit from the plan later in time, the Eighth Circuit rejected this comparison because, according to the court, the critical issue was the plan sponsors’ choice at the time it receives the proposed CCR. “If impeded then, Principal exercises control.”
The result of this decision shows how different courts can apply the same straightforward functional fiduciary test and reach divergent results. Plaintiff lawyers will surely try to extend Rozo and application of the Teets test to circumstances beyond service providers setting fixed rate of investment returns to participants, but their success in doing so might be limited. Keep in mind that Rozo appliedthe rule in Teets, and in Teets the Tenth Circuitcame out the other way in finding that a plan service provider, Great-West Life Annuity and Insurance Company, was not a plan fiduciary with respect to setting a quarterly credited interest rate. The Tenth Circuit focused on the fact that Great-West could impose a 12-month waiting period on a plan sponsor’s attempt to exit the plan following rejection of the credited rate. According to the Tenth Circuit, even though Great-West could impose the 12-month waiting period – because there was no evidence it had ever done so – it was not a functional fiduciary since “there is no evidence a plan has actually been or is likely to be locked in to a Credited Rate for up to 12 months.” The analysis by the Tenth Circuit is curious in that the fact that a contractual term has not previously been implemented does not necessarily preclude its future use, and plan sponsors may well have been unaware of Great-West’s policy not to implement this provision.
Clearly, decisions like Rozo and Teets are highly factually specific analyses where bright-line rules and absolutes cannot be formulated. The best guidance, therefore, is for plan sponsors to have clearly written documents and service provider contracts, that spell out the roles and functions for service providers. This is especially important in the wake of Rozo,litigants will be even more emboldened to liken their specific fact set to the Eighth Circuit’s application of the Teets test. To avoid the unpredictable nature of court analyses, prospective litigants should focus on carefully drafting plan documents and on taking care that plan fiduciaries charged with monitoring service providers ensure that they function in compliance with those plan documents and mandates.
To help navigate and decide issues related to plan service provider fiduciary conduct, plan sponsors should consult their employee benefits counsel.