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.

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