Decision Against Transamerica Criticizes Fiduciary Warranties (and Pretty Much Everything Else) – UPDATED

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.

Immediate Appeal:

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.


Continue reading Decision Against Transamerica Criticizes Fiduciary Warranties (and Pretty Much Everything Else) – UPDATED

Top 5 Reasons Why a Small Business Owner Should Care About ERISA

A good friend in the industry recently came to me with a question that every professional that deals with ERISA has heard 100 times. Why should a small business owner care about ERISA? The response below can hopefully be used to further the dialog.

 #1 – It’s Your Money Too. 

Retirement plans can be designed to benefit both the small business owner and the rank and file employees. In fact, it is commonplace for the small business owner that sponsors a retirement plan to accumulate the biggest account balance. Unfortunately, if the plan is paying unreasonable expenses, it is likely that the owner is paying the lion’s share. Questioning whether fees are reasonable, a specific requirement of ERISA, can enhance the small business owner’s accumulation possibilities as well as for the rank and file.

#2- You’re Personally Liable.

One thing is certain regarding any small business owner accused of fiduciary malfeasance: they quickly become familiar with ERISA Section 409. ERISA Section 409 is not the same as Formula 409, which disinfects and cleans. Instead, ERISA Section 409 can wipe out the financial security of a small business owner that fails to conduct themselves in the best interests of the plan participants, because ERISA Section 409 makes the small business owner personally liable to make good on their mistakes. Read: liability is not limited to business assets. This means the house, the car, and in some circumstances, the fiduciary has even had to cash out their own retirement account to make good on the losses they have caused.

 #3 – The Department of Labor (DOL) Doesn’t Care if You Have 10 Employees or 10,000.

The DOL is funded with tax dollars and thus can put as much work and effort into helping 10 employees recover losses due to fiduciary breaches as they can helping 10,000 employees. Evidence of the DOL’s activity on plans of all sizes can be found at Note the descriptions of the employers and the minimal amounts of money involved in these civil and criminal enforcements. Thus, the small business owner should understand that other small business owners just like them have felt the ramifications of violating ERISA. As Alexander Hamilton stated in the Federalist Papers No. 15, “If there be no penalty annexed to disobedience, the resolutions or commands which pretend to be laws will, in fact, amount to nothing more than advice or recommendation.”

#4 – It’s Easy to Comply if You Get the Right Help.

Complying with ERISA, while complicated, is not impossible as long as you have the right help. ERISA requires a plan sponsor to honestly and prudently self-assess their strengths and weaknesses and then hire qualified help where they lack expertise. Following ERISA means seeking qualified advisors by establishing a documented process that includes the right questions and verified evidence of an advisor’s claim of expertise. Securing the right advisor will help steer the average small business owner through the compliance gauntlet and position the small business owner to focus on what they do best…running their business.

#5 – Better Outcomes for You and Your Employees.

Having an ERISA compliant retirement plan should, in most outcomes, provide employees with a larger source of income later in life. Obviously, this is the very reason retirement plans exist. Consequently, if an employee recognizes this, it can increase loyalty and productivity. It can also allow employees to retire at a time when they are being paid the most in their careers and younger employees are looking to further their careers by moving up the food chain. Nothing will cause a younger work force to flee faster than if they think there is no room to grow.


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7th Circuit decides in favor of Defendant in Leimkuehler v. American United Life Insurance Co.

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.”


If you know of other cases that you would like tracked here, please email Tom at

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Fidelity is Targeted Again and This Time Regarding Its Own In House Plan

Fidelity Investments has been targeted…again.

First, Fidelity, and its related entities, were named as defendants in three sister cases regarding Fidelity’s handling of float in the defined contribution plans they administer. See Kelley v. Fidelity Management and Trust Co.Boudreau v. Fidelity Management and Trust Co.; and Columbia Air Services, Inc. v. Fidelity Management and Trust Co. As has been written about before, these cases are based upon the successful theory that the plaintiffs in the Tussey v. ABB, Inc. case won at trial against Fidelity. See Tussey v. ABB, Inc. Trial Order.

Now, Fidelity has been named as a defendant in a suit brought by a participant in its own in-house 401(k) plan. See Bilewicz v. FMR LLC (Fidelity Investments). The chief allegation is that it was disloyal and a prohibited transaction to only offer Fidelity proprietary funds. Here is a copy of the complaint. As far as we are aware, this lawsuit has received no attention in the retirement community. Fidelity has yet to file a motion to dismiss, but if the plaintiff can get into the discovery stages, it has the potential to be quite explosive. To note, the plaintiffs in this case are represented by most of the law firms that represent the plaintiffs in the Kelley case.

These lawsuits against Fidelity come after they were previously made defendants in Tussey v. ABB, Inc. (as mentioned above), Hecker v. Deere & Co., Loomis v. Exelon Corp., and Renfro v. Unisys Corp., of which Fidelity secured favorable outcomes for itself in the latter three cases.

To note, this is not the first time Columbia Air Services has sued Fidelity. They did so in 2007 and their case was dismissed in 2008. The lawsuit was over the alleged improper retention of revenue sharing by Fidelity. The court dismissed the case finding that Columbia Air Services failed to properly allege that Fidelity was an ERISA fiduciary. Here is a post from 2008 by attorney Stephen Rosenberg. Here is a copy of the order.


If you know of other cases that you would like tracked here, please email Tom at

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Tibble v. Edison International – 9th Circuit Requests Rehearing Response from Defendants

Although much commentary has been written on the 9th Circuit’s affirming of the district court in Tibble v. Edison International, the story is not quite over. On April 4, 2013, the Plaintiffs filed a Petition for Rehearing to both the original panel and en banc (all of the active judges of the 9th Circuit). A copy of the Petition is available here.

Last Friday, April 12, the 9th Circuit requested that the Defendants in the case respond to the Plaintiffs’ Petition. Their response is due in 21 days from the 12, or on Friday, May 3, unless an extension is sought. More or less, three outcomes can come of this. First, both the original panel and the en banc judges can vote no for a rehearing. This means that as far as the 9th Circuit is concerned, the Opinion from March stands. The second outcome is that the three judge panel could address the issues raised in Plaintiffs’ Petition. This would result in an additional opinion. The third outcome is that the three judge panel votes no on rehearing, but the en banc judges of the 9th Circuit vote in favor of the rehearing. This could result in new oral arguments before all of the en banc judges. The outcome would be a new written opinion that either replaces the original opinion or modifies it.

This entire situation is interesting for a variety of reasons, but most notably because only one of the judges on the Tibble panel, Circuit Judge O’Scannlain, is an active 9th Circuit judge and thus eligible to vote for the en banc rehearing. Circuit Judge Goodwin is Senior Status and District Judge Zouhary is from the Northern District of Ohio and sat by designation on the panel, presumably because of the massive caseload of the 9th Circuit.  To note, the writer of the Opinion was Circuit Judge O’Scannlain. Thus, there is at least a possibility of a split between the original panel and the en banc judges over rehearing.

Another interesting fact is that the Plaintiffs have hired the appellate law firm of Stris & Maher, LLP, who signed and filed the Petition. If you are not aware of the reputation of Stris & Maher directly, you have certainly heard of their most successful representation to date of the plaintiff in LaRue v. DeWolff Boberg & Associates, Inc., 552 U.S. 248 (2008) before the United States Supreme Court. Click here for more information.


If you know of other cases that you would like tracked here, please email Tom at

Follow us on Twitter @PlanTools or subscribe via email to receive all future updates about this case and others we are tracking on the ERISA Litigation Index. We will post information as soon as possible after it becomes available.