The 7th Circuit has decided in favor of the defendant in Leimkuehler v. American United Life Insurance Co. (AUL).
A copy of the decision can be found here.
Previously, the district court had decided in favor of AUL finding that they were not a fiduciary to the retirement plan at issue. The district court had granted summary judgment to AUL. The plaintiff had sued alleging that AUL’s control over the revenue sharing paid to AUL from the mutual funds wrapped by separate accounts was a violation of ERISA.
The 7th Circuit affirmed on three grounds.
First, the 7th Circuit found that AUL was not an ERISA 3(21) fiduciary just because it winnowed the universe of 7,500 mutual funds to offering about 400 on their platform for selection by a plan sponsor. AUL decides which mutual funds to include and which share classes of those funds to select. The 7th Circuit found that this situation is no different than the one alleged in Hecker v. Deere & Co. against Fidelity, where they concluded that Fidelity was not a fiduciary. The 7th Circuit also found that this reasoning equally applies to AUL’s selection of share classes of the mutual funds. Key to this decision is that the plan sponsor chooses the final line up, and regardless of whether AUL has the ability to change the investments offered at their discretion, if they don’t exercise that discretion, then they are not a 3(21) fiduciary.
Second, the 7th Circuit found that while AUL was a fiduciary because of their management and control of the separate accounts, “AUL’s control over the separate account can support a finding of fiduciary status only if Leimkuehler’s claims for breach of fiduciary duty arise from AUL’s handling of the separate account.” The court concluded that they do not, stating “Leimkuehler’s claims focus on share-class selection and revenue sharing, and AUL’s maintenance of the separate account involves neither.”
Third, the 7th Circuit addressed the issue raised by the Department of Labor in their amicus brief that “AUL is a fiduciary because, in section 3.3 of its contract with the Plan, it retains the right to delete or substitute the funds Leimkuehler has selected for the Plan.” The court rejected this theory as “unworkable” finding that there was no evidence that AUL had actually exercised this authority they retained. “AUL’s decision not to exercise its contractual right to substitute different (less expensive) funds for the Leimkuehler Plan does not make it a fiduciary.”
Of interest, the 7th Circuit expressed something less than positive views on revenue sharing and mutual funds.
“Although [revenue sharing] has been commonplace for years, until quite recently it was opaque to both individual investors and many 401(k) plan sponsors.”
“Although very little about the mutual fund industry or the management of 401(k) plans can plausibly be described as trans- parent, we agree with the district court that AUL is not acting as a fiduciary for purposes of 29 U.S.C. § 1002(21)(A) when it makes decisions about, or engages in, revenue sharing.”
Also of interest, the 7th Circuit reserved for another day the issue of “whether revenue sharing yields net benefits to individual 401(k) investors.”
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