Court: District Court, D. Massachusetts; May 20, 2014; Federal District Court
Golden Star, Inc. (GSI), as the fiduciary and sponsor of two 401(k) plans, has initiated a class action against MassMutual Life Insurance Company, alleging violations of the Employee Retirement Income Security Act (ERISA). GSI claims MassMutual received revenue sharing payments from third-party mutual funds, which it characterizes as 'kickbacks' and prohibited transactions under ERISA. The central issue is whether MassMutual qualifies as a 'functional fiduciary' in relation to these payments. Following a hearing, the court denied MassMutual's motion for summary judgment.
The factual background indicates that GSI, a Kansas City-based company, administers two 401(k) plans and has engaged MassMutual since 1993 for various services, including investment option management and record-keeping. Participants invest in separate accounts owned by MassMutual, which may include both proprietary and third-party mutual funds. A Group Annuity Contract (GAC) establishes MassMutual's exclusive ownership and control over these accounts, allowing it discretion over investment decisions.
In terms of compensation, the GAC allows MassMutual to charge Separate Investment Account management fees up to 1.0% of the account's market value. The exact application of these fees is uncertain. MassMutual claims to have Participation Agreements with mutual funds that secure revenue sharing payments based on the funds' expense ratios. However, GSI contests this assertion due to MassMutual's inability to produce specific agreements during discovery. The revenue sharing payments vary with the expense ratios, with higher ratios yielding greater payments, which GSI alleges MassMutual retains without appropriate disclosure.
No evidence indicates an increase in fees for any options on the GSI Plan Menu. There is a dispute regarding whether MassMutual provides additional services to mutual funds in exchange for revenue sharing payments (RSPs), with GSI claiming these payments are essentially a 'pay-to-play' arrangement for third-party mutual funds seeking access to retirement plans. MassMutual asserts it has disclosed RSPs to GSI since 2008, contrary to GSI's claim that disclosure began in 2010. MassMutual argues that RSPs offset fees it would otherwise collect for managing separate accounts, a claim disputed by plaintiffs who deny the existence of a dollar-for-dollar offset. The Department of Labor has issued guidance indicating that RSPs received by plan servicers do not violate ERISA if disclosed and used to offset plan payments. The case revolves around disputed facts regarding MassMutual’s disclosure and utilization of RSPs.
In the discussion, the standard of review for summary judgment is defined, emphasizing that it is appropriate when there is no genuine issue of material fact, shifting the burden to the nonmoving party to present sufficient evidence for a jury to consider. A key issue is whether MassMutual acted as a fiduciary in receiving RSPs related to the management of Separate Investment Accounts. ERISA defines fiduciaries broadly, extending liability to those exercising discretionary authority over plan management or assets. The definition emphasizes functional roles rather than formal titles, noting that merely performing administrative tasks does not automatically confer fiduciary duties. The absence of the term 'discretion' in certain statutory provisions indicates a distinction in fiduciary responsibilities concerning asset management.
A person can be deemed a fiduciary of a plan even without discretion or control over its management if they exercise authority or control regarding the management or disposition of plan assets, which includes actions like selecting investments. Several circuits have ruled that any exercise of authority over plan assets satisfies the fiduciary definition under subsection (i), emphasizing that actual exercise of authority is required, not merely possessing it. Additionally, subsection (iii) identifies fiduciaries as those with discretionary authority in plan administration, which may include individuals outside of named plan administrators. The Second Circuit distinguishes between those who exercise discretionary authority without formal granting and those with granted authority regardless of exercise. The Supreme Court has defined "administration" in this context as acting with necessary powers for the plan's purposes. MassMutual argues that plan administration is limited to eligibility and benefit determinations, but this view lacks supporting case law. Subsection (iii) does not encompass management or disposition of assets, which is the focus of subsection (i). Some courts have interpreted plan administration broadly, including the right to modify investment options, indicating that service providers' fiduciary status is an evolving legal area. A functional fiduciary's liability is tied to specific actions and functions related to the plan, necessitating a determination of whether the defendant acted as a fiduciary during the complained action. Under ERISA 404, fiduciaries are imposed with a duty of care and loyalty, requiring them to act with the prudence and diligence expected from a prudent person in a similar role.
ERISA fiduciaries are prohibited from engaging in certain transactions as outlined in ERISA § 406(b), which includes not dealing with plan assets for personal gain, acting on behalf of parties with conflicting interests, or receiving personal compensation in connection with plan transactions. In cases of alleged violations, the burden of proof lies with the fiduciary accused of wrongdoing, requiring them to demonstrate that the transaction falls within an exemption or that compensation received was for non-plan related services.
GSI contends that MassMutual qualifies as a functional fiduciary under multiple subsections of the definition due to its control over various aspects of the GSI Plan. Specific actions cited include: setting management fee rates for Separate Investment Accounts (SIAs), reinvesting mutual fund dividends, altering investment options offered, not providing lower-cost share classes, and owning the separate accounts while investing GSI Plan assets in mutual funds. GSI asserts that MassMutual holds discretionary authority over these elements, even if that authority is not actively exercised, and also argues that its capacity to provide investment advice categorizes it as a fiduciary under another statutory definition.
MassMutual acknowledges that it has fiduciary duties to the Plans but claims it is not a fiduciary concerning revenue sharing payments. GSI argues that MassMutual's ability to establish and withdraw SIA management fees constitutes fiduciary responsibility related to revenue sharing. Under the General Account Contract (GAC), MassMutual can charge a management fee based on a set percentage of the average daily market value of the SIAs, which it has the discretion to determine. Although MassMutual does not dispute its authority to set and draw these fees, it claims that it has not altered the SIA management fee rates. Testimonies from MassMutual employees indicate confusion regarding fee structures, with differing definitions and operations for management fees and "wrap fees," leading to ambiguities in the fee arrangements for the SIAs involved in the litigation.
A disputed issue of fact exists regarding how MassMutual determines its compensation for each SIA associated with a mutual fund, especially when viewing the evidence in favor of the non-moving party. Under ERISA, a service provider may incur fiduciary duties concerning its compensation if it retains the discretion to set such compensation. A service provider typically does not act as a fiduciary regarding the agreement's terms unless it controls the negotiation and approval process. However, once an agreement is made with an ERISA-covered plan, control over compensation factors can confer fiduciary status. Case law supports this, noting that a bank was deemed a fiduciary due to its broad authority to set lending fees. Similarly, another court found that a 401(k) plan administrator gained fiduciary status by having the discretion to set administrative charges within a prescribed maximum.
In the current case, MassMutual asserts it can set fees unilaterally up to a maximum and has discretion over its compensation sources, which include participant fees, payments from the plan sponsor, or revenue sharing from mutual funds. For example, if it needs $100,000 to service a plan and anticipates $50,000 from revenue sharing, it can bill the remaining amount directly to the plan sponsor or participants. Although the specifics of its pricing process are unclear, MassMutual appears to exercise discretion in determining its compensation through management fees and revenue sharing arrangements.
A fact-finder could reasonably conclude that MassMutual acts as an ERISA fiduciary in determining its compensation and managing fees. Additionally, plaintiffs argue that MassMutual's administrative functions, such as processing checks and reinvesting dividends, also trigger fiduciary status under ERISA. Furthermore, GSI contends that MassMutual's authority to modify the mutual fund options on the Plan Menu, which affects revenue sharing, qualifies it for functional fiduciary status, regardless of whether that authority has been exercised.
MassMutual contends that many of GSI’s theories are invalid as they rely on subsection (iii) of ERISA’s fiduciary definition, which MassMutual argues does not pertain to investment decisions related to plan assets. The Department of Labor (DOL) asserts that the selection or limitation of investment options for an ERISA 404(c) plan is a fiduciary function, requiring advance notice and a reasonable period for the plan to accept or reject changes, indicating the plan's authority over investment options.
In Hecker v. Deere, the Seventh Circuit determined that merely having the ability to limit investment options does not confer fiduciary status unless there are other indicators of discretionary control. The investment services company in Hecker was not deemed a fiduciary because the plan retained final authority over investment options. Similarly, in Leimkuehler, the court rejected claims of fiduciary status based on the service provider's authority to select mutual fund share classes or make substitutions, stating that the plan service provider had not exercised this authority.
Leimkuehler acknowledged that the plan’s ultimate authority over investment substitutions was analytically significant. While the Plan Servicer retains the right to make substitutions, it has never exercised this right in a manner that would support a fiduciary claim. Some courts have recognized that the authority to change investment options can confer fiduciary status in specific contexts. Under the contract, MassMutual maintains final authority over mutual fund substitutions, with provisions allowing it to make changes without notifying GSI, who has not initiated any changes to the Plan Menu since 2005. There is no evidence that MassMutual has exercised any authority to substitute funds or acted beyond a ministerial role regarding the Plan Menu.
MassMutual is not deemed a functional fiduciary under subsection (i) of the fiduciary definition because it did not exercise control over the investment options on the Plan Menu during the relevant period. Plaintiffs claim that MassMutual had discretionary authority over plan assets by managing the Separate Investment Account, but this argument is insufficient as there is no evidence of MassMutual selecting investments with reasonable fees and subsequently substituting them for higher-fee options, nor any indication of non-ministerial actions regarding fiduciary status. The evidence supports that MassMutual acted solely in a ministerial capacity concerning the Plan Menu investments. The Court concludes that MassMutual qualifies as a functional fiduciary under subsections (i) and (iii) in relation to its compensation for services provided in Separate Investment Accounts, negating the need to evaluate other fiduciary duty theories presented by plaintiffs. The Court denies the defendant's motion for partial summary judgment. Additionally, 401(k) plans are defined-contribution retirement plans as per Internal Revenue Code Section 401(k). A previous judge instructed the parties to address whether MassMutual is a fiduciary under ERISA prior to class certification deliberations. The case was filed in October 2011, falling within the six-year statute of repose specified in 29 U.S.C. 1113(1). The terms 'share classes' and 'expense ratios' are not thoroughly defined, but differing share classes imply varying pricing structures, with GSI indicating that MassMutual has the capability to alter these classes.
