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California Case Raises Thorny Fiduciary Issues for Record Keepers

In Santomenno v. Transamerica Life Ins. Co., a case that may have a significant impact on small market insurance record keepers, a federal court in the Central District of California rejected a motion to dismiss and raised serious questions about whether the record keeper’s ability to add and delete funds and change the fee schedule were the actions of a fiduciary.

The plan participant who initiated the suit against Transamerica is seeking to represent 15,000 plans serviced by the company.

Other claims that survived raised several key questions:
• Were fees charged by the insurer on top of mutual funds fees excessive?
• Did the insurer invest in the lowest possible share class and use its economic leverage to get the best deal?
• Were fees paid to affiliated companies for advisory services a prohibited transaction?

Questions were also raised about the fiduciary warranty program offered by the record keeper, which protected the employer against employee claims but was paid for by assets from employees’ accounts.

The Santomenno decision seems in direct conflict with the 7th Circuit U.S. Court of Appeals decision in Leimkuehler v. American United Life Insurance, in which the court held that a record keeper’s ability to exercise some discretion over the selection of funds in the menu does not make it a fiduciary. In that case, the 7th Circuit also dismissed claims about revenue sharing and the selection of share classes, since no mismanagement was alleged and the plan sponsor, which had selected the funds before participants invested in them, had the ability to seek a better deal.

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