MassMutual is Found to be a Fiduciary in ERISA Suit by Proposed Class of Client Plans

On May 20, 2014, in Goldenstar v. MassMutual, a long running lawsuit brought by a proposed class of client defined contribution plans, MassMutual Life Insurance Company has been found to be a functional fiduciary under ERISA § 3(21)(i) and (iii) when it determines its own compensation for services provided in the MassMutual Separate Investment Accounts (“SIAs”) it offers through Group Annuity Contracts (“GACs”). The plaintiffs allege that MassMutual violated ERISA when it received revenue sharing payments from third-party mutual funds, further alleging that these payments were essentially “kickbacks” that constituted prohibited transactions under ERISA § 406(b), and violated the fiduciary duties imposed by ERISA § 404.

In finding that MassMutual is a functional fiduciary, the court denied MassMutual’s motion for summary judgment seeking to throw out the lawsuit and will rule in the future on the plaintiffs’ motion for class certification.


The following background facts were relevant to the court’s decision:

  • MassMutual’s GACs state that MassMutual has “exclusive and absolute ownership and control” of the assets in the SIAs, and that “[a]ll assets of MassMutual are invested by MassMutual as it, in its sole discretion, may determine, subject to applicable laws and regulations including, but not limited to, the discontinuance of a Separate Investment Account.”
  • The GACs permit MassMutual to assess Separate Investment Account management fees (“SIA management fees”), and to set the fees at a rate up to 1.0% of the average daily market value of the separate account.
  • MassMutual enters into “Participation” or “Services Agreements” with the third-party mutual funds and The Participation Agreements provide for MassMutual’s receipt of so-called “revenue sharing payments” (“RSPs”) based on the “expense ratio” charged by the mutual funds for the separate accounts. Some “share classes” have higher “expense ratios” than other “share classes,” resulting in higher RSPs.

The Court’s Decision

After conducting an extensive analysis of both old and recent case law on the functional fiduciary tests under ERISA 3(21)(i) and (iii), the court analyzed the two primary arguments made by the plaintiffs for finding that MassMutual is a functional fiduciary: (1) they control their own compensation and (2) they have control over the investments offered inside the SIAs.

The court agreed with the plaintiffs on the first argument and found that MassMutual was a functional fiduciary because it controlled its own compensation:

MassMutual does not contest the fact that it owed some
fiduciary duties to the Plans, but argues it was not a fiduciary “to the extent” it received revenue sharing payments.

Under the GAC, MassMutual can charge [the plaintiff] a “separate investment account management fee,” that consists of a “daily rate which on an annual basis does not exceed 1.0% of the average daily Market Value of the applicable Separate Investment Account.” MassMutual determines where in the range of 0.0 to 1.0% the fee percentage rate will be set. MassMutual does not contest that it exercises its discretion
to set and draw fees from certain separate accounts. However, it
contends it never “altered” the SIA management fee on any

When all reasonable inferences are drawn in favor of the non-moving party, there is a disputed issue of fact as to when and how MassMutual determines its compensation for each SIA involving a single mutual fund. Generally speaking, a service provider “does not act as a fiduciary with respect to the terms in the service agreement if it does not control the named fiduciary’s negotiation and approval of those terms.” Hecker v. Deere & Co., 556 F.3d 575, 583 (7th Cir. 2009)

However, “after a person has entered into an agreement with an ERISA-covered plan, the agreement may give it such control over factors that determine the actual amount of its compensation that the person thereby becomes an ERISA fiduciary with respect to that compensation.” F.H. Krear & Co. v. Nineteen Named Trustees, 810 F.2d 1250, 1259 (2d Cir. 1987)

In the instant case, MassMutual had the discretion to
unilaterally set fees up to a maximum and exercised that
discretion. MassMutual asserts that its compensation may come
from any combination of three sources: (a) fees charged to plan
participants, (b) direct payments from the plan sponsor, or (c)
revenue sharing payments from mutual funds. MassMutual explains, “By way of example, if MassMutual, in the pricing process, determines it needs $100,000 to service a plan, and it projects it will receive $50,000 in revenue sharing, then the Plan can have MassMutual directly bill the Plan sponsor or the Plan participants for the other $50,000.” Def.’s Mem. in Supp. of Mot. for Summ. J., at 5.

While the mechanics of the “pricing process” are unclear in the record, as stated earlier, it appears that MassMutual exercises the discretionary authority to determine its own compensation by setting SIA management fees (up to a maximum), which in combination with RSPs, make up the compensation package. A reasonable fact-finder could determine that MassMutual functions as an ERISA functional fiduciary under subsection (i) to the extent it determines its own compensation, takes fees out of the separate accounts, and has the discretion to offset some or all of the RSPs against management fees as its compensation.

In addition, Plaintiffs argue that MassMutual’s services to
the Plan (like sending out checks to plan members or reinvesting
dividends) fall within the definition of “administration of the
plan,” triggering fiduciary status under subsection (iii) as well. To the extent MassMutual has discretionary control over factors governing its fees after entering into its agreement with [the plaintiff] for administration of the Plan, subsection (iii) is implicated as well.

The court disagreed with the plaintiffs on the second argument and found that MassMutual was not a fiduciary with respect to the change of or potential changing of investments in the SIAs:

Subsection (i) of the functional fiduciary definition does
not apply because MassMutual never exercised any authority to
control the investment options available on the Plan Menu during the limitations period. Plaintiffs argue that MassMutual at least possessed discretionary authority over the plan assets by controlling the investment of the Separate Investment Account, even if it never exercised this discretion. Even if the discretion to substitute investments on the Plan Menu falls within a broad definition of “administration” of the plan, plaintiffs’ argument fails under the “to the extent” requirement. Plaintiffs have presented no evidence that MassMutual selected investment options with reasonable fees and then unilaterally substituted funds with high fees or took any non-ministerial actions in connection with this fiduciary status. The only evidence is that it acted in a purely ministerial role with respect to investments on the Plan Menu.

Our Thoughts

This decision is another that finds an insurance company offering services to defined contribution plans is a fiduciary or a potential fiduciary under ERISA. (See The Roller Coaster Continues: Court Finds ING a Fiduciary Over Revenue Sharing Practices. Schedules Trial for September and Decision Against Transamerica Criticizes Fiduciary Warranties (and Pretty Much Everything Else) – UPDATED) This runs contrary to other decisions finding no fiduciary liability. (See 7th Circuit decides in favor of Defendant in Leimkuehler v. American United Life Insurance Co.)

What we are seeing is that these decisions seem to be based on a combination of which circuit the lawsuit is brought in and the specific practices of each insurance company in how they are setting up and operating their separate account investments as part of the group annuity contracts offered. Whether we will see a uniform rule of law (i.e. will the Supreme Court ever hear one of these cases) may have had its chances reduced when the parties in the ING  lawsuit sought preliminary approval for settlement before the trial court could enter its decision from the four week trial that happened last year. (See ING Settles ERISA Class Action Lawsuit Over Revenue Sharing Practices)

We will keep you posted on any updated decisions.

8th Circuit Denies Both Rehearing Petitions in Tussey v. ABB – Next Up is the Supreme Court

On Tuesday, May 20, 2014, the 8th Circuit Court of Appeals denied both the plaintiffs’ and ABB’s petitions for rehearing in Tussey v. ABB, Inc. Without explanation, both the original panel of three judges and the court en banc, meaning all active judges of the 8th Circuit, declined to rehear the case.

As we previously laid out when the original decision came down ( see Tussey v. ABB Affirmed, Reversed, and Vacated in Part by 8th Circuit) ultimately this case is going to be appealed to the US Supreme Court, almost without a doubt by both the plaintiffs and by ABB. Because the US Supreme Court only hears about 100 cases out of 10,000+ appealed to them each year, the chances are slim that the case will be taken. On the other hand, they’ve recently shown interest in ERISA fiduciary matters by agreeing to hear an appeal of the 6th Circuit’s stock drop jurisprudence (see Supreme Court Will Hear Stock Drop Appeals) and their request for DOL input on the plaintiffs’ appeal in Tibble v. Edison (see Supreme Court Requests DOL Opinion in Tibble v. Edison Petition). We should expect an opinion in the stock drop case any time between now and the end of June.

If the Supreme Court declines to hear either party’s appeal in Tussey, then the case will ultimately be remanded back to the district court to re-decide the investment claims under an abuse of discretion standard. And in that scenario, the following issues will be considered final regardless of the remand: (1) Fidelity will have succeeded in defeating all claims against it, and (2) ABB will have have been found liable for paying excessive recordkeeping fees to Fidelity.

Court Finds Catholic Hospital Plan is a Church Plan – Overall v. Ascension Health

Today, May 9, 2014, the court in Overall v. Ascension Health dismissed the plaintiff’s claims seeking to find that the pension plans sponsored by defendants are not church plans, and thus subject to ERISA. Instead, the court agreed with the defendants and the long time IRS interpretation of the church plan exemption and ruled as a matter of law that the plans in question qualify for the church plan exemption from ERISA.

The lengthy decision can be boiled down to this passage:

In Dignity Health and Saint Peters, the district courts interpreted section (A) as a gatekeeper of section (C). That is, these courts concluded that section (A) sets the standard–only a church can establish a church plan– and section (C) only describes how a plan under section (A) can be maintained. The problem with this interpretation is that section (C) uses the word “includes” not “subject to.” Section (C) says that “A plan established and maintained . . . by a church includes a plan [meeting the requirements of section (C)(I]. As Ascension puts it “under the rules of grammar and logic, A is not a ‘gatekeeper’ to C; rather if A is exempt and A includes C, then C is also exempt.” (Doc. 71 at p. 2). This is how the Court interprets section (C). In other words, a church plan may include a plan that meets the requirements of section (C). Section (C) requires that the plan maintained by an organization that is either (1) controlled by or (2) associated with a church or convention of churches. To find otherwise would render section (C) meaningless.

As referenced, this decision by the court in the Eastern District of Michigan came to the opposite conclusion of previous decisions in the Northern District of California in Rollins v. Dignity Health (Court Finds Plan Sponsored by Catholic Hospital is NOT a Church Plan) and the District of New Jersey in Kaplan v. Saint Peter’s Healthcare System (Court Finds St. Peter’s Pension Plan is NOT a Church Plan & A New Case is Filed in Chicago).

Interestingly, the court here found that the use of the phrase “includes” rather than “subject to” made the difference in the court’s interpretation that Section (A) was not a “gatekeeper” to Section (C). Notably, the court did not directly address the fact that the word “established” is missing from the second part of Section (C), which was so important to the previous two court’s decisions.

After concluding that the long time interpretation by the IRS is in fact the proper test (i.e. a plan qualifies for the “church plan” exemption if the organization maintaining it is either controlled by or associated with a church), the court found that the plans involved met the test.

Additionally, the court dismissed the plaintiffs’ constitutional argument that to the extent the statute is interpreted to permit organizations associated with a church to claim church plan status, it violates the First Amendment’s Establishment Clause. It agreed with defendants’ argument that the plaintiff failed to allege that she suffered any injury-in-fact as to her constitutional claim and therefore does not have standing to pursue it. Thus, the case was dismissed in its entirety.

Our Thoughts

It is not surprising that different courts have come to different conclusions as to the proper interpretation of the church plan exemption found in ERISA. We’ve guessed since these cases were filed, that the “final” answer, if there is one, will end up coming from the circuit courts, if not the US Supeme Court.

In what appears to this blog as a highly unusual move and in probable recognition of the hotly contested interpretation, the judge deciding the case included an extra section of the decision entitled CODA that appeared to explain in non-judicial terms why the court was required to rule the way that it did (see here for the definition of CODA):

The Court recognizes the considerable number of people, like plaintiff, are employed in the health care industry and not in religious related or directed duties. However, the pension plans in which they are participants are church managed plans. As such, they are exempt from ERISA’s coverage and protections. This is so because the health care entity with whom they are employed is in fact controlled by and associated with a church. In this case, Ascension Health’s managerial system has a direct line to the Roman Catholic Church in the Vatican.

While plaintiff may not have the benefit of ERISA’s protections, the pension plans are [sic – assuming the meant to include the word “not”] wholly unregulated. They are governed by state law. See Cassidy v. Akzo Nobel Salt, Inc., 308 F.3d 613, 615 (6th Cir. 2002) (“Interpreting a non-ERISA contract claim requires federal courts to look only to state law principles . . .” (citing Erie R.R. v.
Tompkins, 304 U.S. 64, 58 S.Ct. 817, 82 L.Ed. 1188 (1938))).

The church exemption is a congressional choice of historic proportion. And while it may appear to be an irrational distinction, it is a distinction mandated by law.