Tag Archives: Golden Star v. MassMutual

MassMutual Settles Excessive Fee Lawsuit

On Friday, October 31, 2014, the parties in Goldenstar, Inc. v. MassMutual Life Insurance Co. filed a motion seeking the court to approve a settlement agreed to by the parties. (See previously MassMutual is Found to be a Fiduciary in ERISA Suit by Proposed Class of Client Plans)

The settlement agreement (Part 1 and Part 2) allows for two settlement classes to be approved: (1) the Monetary Relief Class and (2) the Structural Changes Class. The Monetary Relief Class covers current and past retirements plan customers of MassMutual, while the Structural Changes Class covers current and future retirement plan customers of MassMutual.

To note, it appears that the lawsuit brought by MassMutual’s own employees is not affected by this lawsuit (See Breaking: New Excessive Fee Case Filed By MassMutual Employees) as the following parties are excluded as plaintiffs:

Excluded from the Classes are (1) Defendant, (2) any administrators of retirement plans (“Plans”) for which Defendant’s directors, officers or employees are beneficiaries, (3) any Plans for which the Judge(s) to whom this case is assigned or any other judicial officer having responsibility for this case is a beneficiary, (4) any Plans that were former Hartford Plans (as that term is defined in the Settlement Agreement), and (5) any Plans which are invested through registered products.

The Monetary Class will receive a payment of $9,475,000, which will be reduced a claim for attorney’s fees up to 1/3 and costs up to $315,000.

The Structural Changes Class is much more involved. The promised changes to be implemented over the next 12 months include:

Defendant shall make the following changes to the menu(s) of investments it offers (“Product Menu(s)”):

(a) Defendant shall identify to plan sponsors, via MassMutual’s plan sponsor website or other electronic media made available by Defendant to the plan sponsor (“Plan Sponsor Website”), any addition of any insurance company Separate Investment Account, Mutual Fund, Bank Collective Trust Fund or other investment option (collectively “Funds”), to the Product Menu(s). Defendant shall inform current plan sponsors within ninety (90) days of the effective date of any settlement and future plan sponsors at point of sale in writing that such additions are identified on the Plan Sponsor Website;

(b) Defendant shall advise all current and future Plan fiduciaries that, notwithstanding any provision in any group annuity contract or group funding agreement (“Group Contract”), Defendant would not delete, change or replace any Funds (including share classes of a given Fund) on the Product Menu that is in a Plan’s selected investment lineup without: (1) providing an applicable fiduciary for each affected Plan with sixty (60) days’ written notice, and (2) obtaining a plan fiduciary’s consent to the proposed change, subject to the qualification that Defendant can remove a Fund from the Plan’s lineup if it is no longer available through merger or otherwise and further provided that a Plan fiduciary’s failure to object will be treated as consent to the proposed change. If the fiduciary affirmatively rejects the proposed change and Defendant ultimately implements the change, the Plan fiduciary has the right to terminate its Group Contract with Defendant without application of a surrender charge or similar charge (a “penalty”) and the Plan fiduciary will be provided with an additional sixty (60) days from the effective date of the change to identify an alternative service provider. The conditions described in this subparagraph (b) only apply to Fund changes initiated by the Defendant and not to any Fund changes initiated by an investment provider other than Defendant; and

(c) Defendant shall provide to plan sponsors notice on the MassMutual’s Plan Sponsor Website of any removal of a Fund from the Product Menu. Such notice shall be published on such website at least thirty (30) days prior to the removal, and shall state the effective date of the removal. The conditions described in this subparagraph (c) only apply to the removal of a Fund initiated by Defendant and not to the removal of a Fund initiated by an investment provider other than Defendant. Defendant shall inform current plan sponsors within ninety (90) days of the effective date of any settlement and future plan sponsors at point of sale in writing that such deletions will be identified on the Plan Sponsor Website.

Defendant shall provide on the Plan Sponsor Website for each fund made available by MassMutual a disclosure of the expense ratio for each Fund, including the amount, if any, of the SIA Management Fee or other direct fees specifically associated with each Fund. MassMutual shall also disclose for each Fund made available by MassMutual the revenue paid to MassMutual from a Fund, including disclosure of those Funds that make no revenue sharing payments to MassMutual.

Defendant shall modify its written point of sale disclosure, so as to:

(a) advise Plans that Defendant offers various Funds, including various share classes of certain Funds, to retirement plan customers depending on the amount of direct fees plan sponsors choose to pay and other factors, that these various Funds pay to Defendant differing amounts of revenue sharing as a percentage of the Funds’ assets, that only one share class of each Fund is typically offered to a Plan consistent with the Defendant’s pricing and product offering and that, as an investment option under a retirement plan, the primary difference between share classes of a Fund is the Fund’s expense ratio (i.e., the amount that the Plan’s participants pay as a Fund expense) and the amount of revenue sharing that Defendant receives from the Fund, which is paid from the revenue derived from the Fund’s fees and expenses, and that Funds are available to all Plans that pay no revenue sharing of any kind resulting in the expenses of a Plan being paid for entirely by direct fees assessed to the Plan and/or its participants;

(b) explain that revenue sharing payments are made by certain, but not all, Funds and the amount of revenue sharing payments received can be dependent on the share class(es) offered by the Fund and the share class(es) chosen by Defendant; and

(c) advise Plans that more detailed information regarding the share classes available on various menus offered by Defendant, as well as the revenue sharing associated with those share classes, and the revenue sharing received in connection with the plan’s investments, would be provided upon written request to Defendant.

Each of the Plans in the Settlement Classes will be deemed to have elected to reinvest all mutual fund dividends from the effective date of the Plan’s Group Contract. Defendant’s point of sale disclosures will now provide that, as a result of entering into a contractual relationship with Defendant through a Group Contract, each Plan is directing Defendant to reinvest any mutual fund dividends.

Defendant will include in its proposal an explanation of the option for Plan customers to pay all fees to Defendant through direct charges and, if requested by the plan sponsor or its advisor, will offer a menu of Funds for which Defendant does not receive revenue sharing payments.

Defendant shall not make any change in the compensation that it receives from the Plans, including the SIA Management Fees or the Funds without providing each affected Plan with sixty (60) days written notice and an opportunity to terminate its Group Contract without penalty if the changes are not acceptable.

The filings do not provide a monetary value to this affirmative relief.

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.

Background

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
accounts.

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.