On Friday, September 26, 2014, in Santomenno v. John Hancock, et al. the Third Circuit Court of Appeals found in favor of the John Hancock defendants in a putative ERISA class action filed against them over excessive fees, affirming the district court’s dismissal of the lawsuit. There have been a number of well drafted blog pieces on the specifics of the decision that I would recommend to our readers. See summaries by Sidley Austin and Alston + Bird. The essence of the decision is that the plaintiffs failed to show that Hancock was a fiduciary for the conduct alleged.
Instead what I want to focus on here is the bigger picture for our readers. The decision in favor of Hancock comes after recent decisions have found similar service providers to be fiduciaries and other than have found them not to be:
- MassMutual is Found to be a Fiduciary in ERISA Suit by Proposed Class of Client Plans
- Morgan Stanley Dodges a Bullet: ERISA Lawsuit Dismissed
- The Roller Coaster Continues: Court Finds ING a Fiduciary Over Revenue Sharing Practices. Schedules Trial for September
- Decision Against Transamerica Criticizes Fiduciary Warranties (and Pretty Much Everything Else) – UPDATED
- 7th Circuit decides in favor of Defendant in Leimkuehler v. American United Life Insurance Co
In most cases, there are no allegations that the service provider is a fiduciary by title such as the Named Fiduciary or the Plan Administrator. Instead, whether the plaintiffs can show the provider is a fiduciary turns to the functional fiduciary test under ERISA 3(21)(A), which by its very nature is fact driven. From there, ignoring 3(21)(A)(ii) which governs investment advice and has a specific set of regulations that are more easily understood, the plaintiffs have been trying to show fiduciary status through 3(21)(A)(i) and (iii). Those provisions read as follows:
a person is a fiduciary with respect to a plan to the extent
(i) he exercises any discretionary authority or discretionary control respecting management of such plan or exercises any authority or control respecting management or disposition of its assets,
(iii) he has any discretionary authority or discretionary responsibility in the administration of such plan…
The cases are holding with few exceptions that the functional fiduciary test under 3(21)(A(i) must show that the fiduciary actually exercised their discretion. In decisions in favor of AUL and John Hancock, the plaintiffs were unable to show that. In decisions against Transamerica, MassMutual, and ING, the plaintiffs were able to either show the exercise of discretion or that it was a issue of fact for trial. (I would also submit that the quality of the complaint and the level of detail as to the allegations has also played a part, but an academic analysis of the complaint in these cases might be the subject of a later post)
The decisions are also focusing on the “to the extent” language in the opening line of 3(21)(A), which limits fiduciary liability only to those duties that are specifically that actors. This happened here in the Hancock case, as well as in Hecker v. Deere, where the courts have consistently rejected that fiduciary status comes from the design of a larger investment menu that an actual plan fiduciary then chooses from, even if the provider is a fiduciary in other respects. However, see the decision against Transamerica which seemed to challenge the to the extent language in finding that they should have been responsible over ensuring their own fees were reasonable after becoming a fiduciary.
The open question from these cases is whether 3(21)(A)(iii) requires the actor to actually exercise their discretion or not, i.e. it’s a fiduciary breach to be both malfeasant and nonfeasant. The reason this has not been as prominent is that in most instances, the allegations are centered around the investments which generate the fees and they have little to do with plan administration. The chances are high that allegations against the large service providers in the future will involve claims under 3(21)(A(iii), even if the investments are the core of the conduct, i.e. revenue sharing.