A little reported decision out of the Central District of California, Santomenno v. Transamerica Life Ins. Co., No. 12-2782, has the opportunity to cause great heart burn (or worse) to insurance company platforms for retirement plans. A plan participant from two different retirement plans filed a class action lawsuit against Transamerica Life Ins. Co. (“TLIC”) seeking to represent a class of over 15,000 retirement plans serviced by TLIC. A copy of the complaint can be found here.
In a sweeping decision on TLIC’s motion to dismiss, the court found that plaintiffs have plausibly alleged numerous fiduciary violations of ERISA including that TLIC, because of the facts and circumstances alleged, may be a fiduciary with responsibility to monitor its own compensation.
The following claims survived TLIC’s motion to dismiss:
- Fees TLIC charges in excess of the fees charged by an underlying mutual fund are excessive.
- TLIC’s investment management fees on separate accounts are excessive.
- TLIC receives “fee income” or “Revenue Sharing Payments” from Plaintiffs’ investments, ranging from 15 to 25 bps.
- TLIC breached its ERISA fiduciary duties by
- Failing to invest in the lowest cost share class of the mutual funds underlying separate account investment options, even though TLIC had the leverage to do so.
- Failing to use its economic leverage to negotiate lower fees for collective trusts and traditional separate accounts.
- TLIC committed prohibited transactions under ERISA § 406(b), 29 U.S.C. § 1132(a)(3), by paying advisory fees from employees’ accounts to affiliates Transamerica Investment Management, LLC (“TIM”) and Transamerica Asset Management, Inc. (“TAM”) for advising or subadvising certain mutual funds, collective investment trusts, or traditional separate accounts.
The court also criticized the fiduciary warranty included in the plan’s contracts. “Based on the allegations before the court, it appears that the Fiduciary Warranty amounts to insurance provided by TLIC to employers against law suits by employees for breach of fiduciary duty, but this insurance is paid for by the fees assessed on the employees’ assets. The court has found no indication that the employers pay TLIC separately for such insurance. Thus, instead of an insurance company bargaining with a party seeking to obtain the best rate for itself in its insurance purchase, the insurer is bargaining with a party who is not in fact bearing the financial burden of the insurance, though it will reap the benefits. Because the contract does not appear to have been negotiated at arm’s length, TLIC may not shield itself behind the contract from an alleged breach of duty.” Order at 15.
“Plaintiffs may be able to show that TLIC used the promise of the fiduciary warranty to direct employers to select TIM- and TAM-managed accounts,” which the court found could be a prohibited transaction. Order at 26.
TLIC has filed a 1292(b) motion asking the district court to certify the following question for immediate appeal to the 9th Circuit Court of Appeals. (such appeals are rarely asked for and even more rarely granted):
Whether a service provider is a fiduciary with respect to fees charged to an ERISA plan where the plan’s named fiduciary agreed to the fees before the service provider charged and collected them.
The district court has yet to rule on this motion. We are tracking the case and you will hear about any developments here first.
UPDATE April 25, 2013 6:00pm Central: The district court has denied Defendants’ motion. Barring any other maneuvers, the case will now proceed to the discovery phase.