The Roller Coaster Continues: Court Finds ING a Fiduciary Over Revenue Sharing Practices. Schedules Trial for September.

The roller coaster of who is and isn’t a fiduciary under ERISA section 3(21)(A) continues its seemingly out of control ride. Today, August 9, 2013, a district court in Connecticut ruled ING Life Ins. and Annuity Co. (“ILIAC”) a fiduciary related to its revenue sharing practices and scheduled a four week trial to begin anytime after September 3.

The lawsuit, Healthcare Strategies v. ING Life Insurance and Annuity Co., was previously certified as a class action, with the following class definition:

All administrators of employee pension benefit plans covered by the Employee Retirement Income Security Act of 1974 subject to Internal Revenue Code §§ 401(a), (k) with which ING has maintained a contractual relationship based on a group annuity contract or group funding agreement and for which, since February 23, 2005, ING has received revenue sharing payments (e.g., asset based sales compensation, service fees under distribution and/or servicing plans adopted by funds pursuant to Rule 12b-l under the Investment Company Act of 1940, administrative service fees and additional payments, and expense reimbursement) from any mutual fund, investment advisor or related entity.

Said another way, the two plan administrator class representatives who filed suit now represent what is most likely every one of ILIAC’s retirement plan clients. As a reminder, this class definition survived an interlocutory Rule 23(f) appeal to the 2nd Circuit when they failed to take the appeal.

The plaintiffs here allege:

(1) ILIAC has included certain mutual funds as investment options based on the funds’ revenue sharing payments to ILIAC rather than the funds’ potential to benefit the plans,
(2) ILIAC’s receipt of revenue sharing payments constitute prohibited transactions under ERISA 406(b)(1) & (3),
(3) The fees charged by ILIAC to the plans do not bear a meaningful relationship to the cost of the services provided, and they thus constitute excessive compensation to ILIAC, and
(4) By taking as its compensation the spread between the guaranteed payment and the investment performance of assets in fixed accounts and guaranteed accumulation accounts, ILIAC has retained excessive compensation and engaged in self-dealing.

The reason that I paint this decision as a runaway roller coaster is that its core ruling finding ILIAC a fiduciary is squarely at odds with recent decisions such as the 7th Circuit case Leimkuehler v. American United Life Insurance Co. At issue is ILIAC’s authority, as an insurance company platform that controls and sells separate accounts wrapped around mutual funds, to change, add, or eliminate the funds that may be invested by 401(k) plan participants when it determines that such a change is “desirable . . . to accomplish the purpose of the Separate Account,” and whether that authority confers fiduciary status. In order to exercise such discretion over a plan’s investments, all that is required of ILIAC is that it notify the plan trustees of any such action.

ILIAC and the plaintiffs agreed that to the extent ILIAC actually exercises its contractual authority to substitute funds in a plan, it is acting in a fiduciary capacity with respect to any revenue-sharing payments it acquires from that change. However, ILIAC argued that under ERISA section 3(21)(A)(i), its fiduciary status is limited to the extent it actually “exercises . . . discretionary authority” to manage a plan. Thus, ILIAC sought to limit its fiduciary duty to the two isolated occasions during the last 10 years that it actually substituted funds. This would be consistent with the ruling in Leimkuehler.

However, the court, relying on 2nd Circuit law which the Connecticut district court is required to follow, found that such an interpretation of an ERISA fiduciary is too limited, particularly given the mandate that the term “fiduciary” be broadly construed. Slip op. at 13. Instead, the 2nd Circuit in Bouboulis v. Transp. Workers Union of Am., 442 F.3d 55, 63 (2d Cir. 2006), holds that section 3(21)(A) creates a “bifurcated test”:

Subsection one imposes fiduciary status on those who exercise discretionary authority, regardless of whether such authority was ever granted. Subsection three describes those individuals who have actually been granted discretionary authority, regardless of whether such authority is ever exercised.

Thus, the court found that ILIAC is a fiduciary under 3(21)(A)(iii) related to its control over the funds. Key to this conclusion was the court’s finding that services performed by ILIAC could be defined as “plan administration,” the language found in (iii), as opposed to the “plan management” language found in (i). The court held that under 2nd Circuit and Supreme Court authority, “plan administration” should be ready broadly. Finally, the court addressed the Leimkuehler decision and distinguished it based upon the fact that the plaintiffs there failed to argue fiduciary status under (iii) and instead solely argued under (i).

As it was a ruling on ILIAC’s motion for summary judgment, the court held that there were triable issues of fact related to whether ILIAC’s control and receipt of revenue sharing was within the scope of it’s fiduciary duties owed from having authority over changes to plan funds, and required each side to be ready for a four week trial anytime after September 3.

So what does this mean?

(1) It means that the fiduciary duties related to the control and receipt of revenue sharing are far from settled. On one side we’ve got cases such as Tussey v. ABB, Inc. and Santomenno v. Transamerica Life Ins. Co. On the other, we’ve got Leimkuehler and Tibble v. Edison Int’l (that foreclosed an ERISA section 406(b)(3) claim because revenue sharing was ruled not to be a plan asset).

(2) Any provider that receives revenue sharing as compensation should carefully analyze their own practices in light of this decision and others. This is especially so in light of other recent news such as the settlement between a fiduciary investment advisor and the Department of Labor (“DOL”) over charges the advisor failed to disclose the receipt of revenue sharing that amounted to 10 times the contracted fee with the client. ($500,000+ v. $50,000). How serious is this issue? The DOL initially sought injunctive relief that would have forever prohibited the advisor from acting as a fiduciary to a qualified plan again, which probably would have shut down the advisor’s business. Instead, the advisor agreed to pay $200,000+ and to forever disclose all forms of compensation to every current and future client in perpetuity. Either punishment is nasty business.

(3) The second breed of ERISA breach cases involving classes of plans, rather than classes of one plan’s participants, are finally progressing to a determination of liability. The potential damages are magnitudes higher, as is the catastrophic harm to a service provider.

Here is the call to action. Mitigate your risk and exposure over the receipt of revenue sharing as compensation if you are a service provider or the payment of revenue sharing if you are a plan sponsor, through the implementation of a comprehensive plan and prudent procedures, that at a minimum includes an analysis of fiduciary identification, exercise, and authority. If you are unsure of how to do so, seek the help of a qualified entity with demonstrated expertise (such as FRA PlanTools).

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