To date, most of the excessive fee cases of note have been participants seeking redress from plan fiduciaries, but a recent case features a plan sponsor against their provider.
The ruling, by the U.S. Court of Appeals for the 8th Circuit in McCaffree Fin. Corp. v. Principal Life Ins. Co., No. 15-1007, affirmed the lower court’s rejection of a class action lawsuit brought by McCaffree Financial Corp. on behalf of participating employees in the McCaffree Employee Retirement Program against Principal Financial Group, with which McCaffree had contracted to provide the plan’s investment options.
McCaffree alleged that Principal had charged McCaffree’s employees excessive fees in breach of a fiduciary duty Principal owed to plan participants under ERISA. The district court granted Principal’s motion to dismiss for failure to state a claim.
The Case
In September 2009, McCaffree and Principal entered into a contract whereupon Principal agreed to offer investment options and associated services to McCaffree employees participating in the McCaffree retirement plan. Under the contract, Principal provided plan participants with a number of investment options, including a “general investment account” offering guaranteed interest rates, as well as various “separate accounts,” which Principal had created to serve as vehicles for retirement-plan customers to invest in Principal mutual funds.
Principal reserved the right to limit which separate accounts (and therefore which mutual funds) it would make available to plan participants. In addition, McCaffree also maintained the ability to limit, via written notice to Principal, the accounts in which its employees could invest. In accordance with those provisions, the full list of 63 accounts included in the plan contract was narrowed down to 29 separate accounts (and associated Principal mutual funds), which were made available to plan participants.
McCaffree claimed that the separate accounts served no purpose other than to invest in shares of various Principal mutual funds and therefore involved minimal additional expense for Principal, and because each Principal mutual fund charged its own layer of fees, McCaffree alleged, the additional separate account fees were “unnecessary and excessive.” McCaffree’s suit sought to recover for plan participants these separate account fees as well as the diminution of investment returns that had occurred as a result of the fees.
For its part, Principal argued that McCaffree had failed to state a claim under ERISA because McCaffree had agreed to the disputed charges explicitly in its contract with Principal and because Principal was not a fiduciary at the time the parties agreed upon the allegedly excessive fees.
The district court granted Principal’s motion to dismiss, holding that Principal was not acting as a fiduciary at the time the fees and expenses were negotiated, and that any subsequent fiduciary duty Principal owed lacked a sufficient nexus with McCaffree’s excessive fee allegations.
The Arguments
In support of its affirmation of the district court’s dismissal, the appellate court noted that because Principal did not owe plan participants a fiduciary duty while negotiating the fee terms with McCaffree, Principal could not have breached any such duty merely by charging the fees described in the contract that resulted from that bargaining process.
The appellate court also noted that McCaffree never asserted that only some of the 63 accounts in the contract had excessive fees, or that Principal used its post-contractual account selection authority to ensure that plan participants only had access to the higher-fee accounts. Rather, the complaint expressed concerns with the management fees and operating expenses associated with all of the separate accounts.
Third, while McCaffree argued that Principal’s discretion to increase the separate account management fees and to adjust the amounts charged to participants as operating expenses supports its claim that Principal was a fiduciary, the court said that the plaintiffs failed to argue any connection between this ability and the excessive fee allegations.
Fourth, McCaffree alleged that Principal provided participants with “investment advice,” giving rise to a fiduciary duty, but the court said they failed to allege facts establishing a nexus between the separate account fees and any investment advice Principal may have provided.
Finally, the court noted that Principal’s enforcement of the terms of its contract with McCaffree did not implicate any fiduciary duties, and McCaffree failed to establish a connection between its excessive fee allegations and any post-contractual fiduciary duty Principal may have owed to plan participants.
