A federal appeals court has affirmed summary judgment in a class action suit involving 270,000 plan participants across more than 13,000 plans.
The suit was filed in 2015 by plaintiff John Teets, a participant in the Farmers’ Rice Cooperative 401(k) Savings Plan, which had contracted with Great-West for recordkeeping, administrative and investment services. The suit, which had been granted class action status on behalf of all plans and participants invested in the particular fund, alleged that Great-West (the defendant) acted as an ERISA fiduciary with respect to the fund because it exercised authority or control over the management of disposition of plan assets, specifically the Great-West Key Guaranteed Portfolio Fund, a fund that (as the court notes), “as the Fund’s full name suggests, is operated by Defendant.”
Teets alleged three ERISA violations:
- Great-West breached its general duty of loyalty under § 404 by (1) setting the Credited Rate for its own benefit rather than for the plans’ and participants’ benefit, setting the Credited Rate artificially low and retaining the difference as profit, and charging excessive fees.
- Great-West, again acting in its fiduciary capacity, engaged in a prohibited transaction under § 406(b) by “deal[ing] with the assets of the plan in [its] own interest or for [its] own account.”
- An alternative claim alleged that Great-West was a non-fiduciary party in interest to a non-exempt prohibited transaction under § 406(a) in using plan assets for its own benefit.
In December 2017, the district court granted summary judgment for Great-West, concluding that Great-West was not acting as a fiduciary of the plan or its participants, and that Great-West’s contractual power to choose the Credited Rate did not render it a fiduciary under ERISA because participants could “veto” the chosen rate by withdrawing their money from the KGPF.
As to Great-West’s ability to set its own compensation, the lower court held that Great-West did not have control over its compensation and thus was not a fiduciary because “the ultimate amount it earned depended on participants’ electing to keep their money in the KGPF each quarter.”
As for the third, alternative argument, the district court also granted summary judgment, “concluding that Great-West was not liable as a non-fiduciary party in interest because Mr. Teets had failed to establish a genuine dispute as to whether Great-West had “actual or constructive knowledge of the circumstances that rendered the transaction unlawful.”
Ultimately, since Great-West was found not to be an ERISA fiduciary, all of the claims were rejected by the court, which granted summary judgment to the defendants.
In considering the appeal, the three-judge panel in the U.S. Court of Appeals for the 10th Circuit (Teets v. Great-West Life, case number 18-1019) focused on (1) whether Great-West is a functional fiduciary because it “exercises ... authority or control” over plan assets when its sets the Credited Rate or its compensation; and (2) whether, if Great-West is not a fiduciary, it is liable as a non-fiduciary party in interest for its participation in a transaction prohibited under ERISA.
The appellate court cited a two-step analysis to determine whether a service provider is a functional fiduciary when a plaintiff alleges it has acted to violate a fiduciary duty, notably that: “an ERISA plaintiff must show the service provider (1) did not merely follow a specific contractual term set in an arm’s-length negotiation; and (2) took a unilateral action respecting plan management or assets without the plan or its participants having an opportunity to reject its decision.”
Here the court noted that “when plans and participants have a ‘meaningful opportunity’ to reject a service provider’s unilateral decision, courts have held the service provider is not a fiduciary,” and that here – while Great-West certainly exercised control in establishing the crediting rate, the “plan and/or its participants can ‘vote with their feet’ if they dislike the new rate,” even though there was a contractual provision that allowed Great-West to impose a waiting period of up to one year – because Great-West had never actually imposed that restriction, and thus the argument was found to be “speculative.”
The court noted that the plaintiff had “provided no evidence that even the potential of Great-West’s imposing a waiting period has affected any plan’s choice to continue with or withdraw from the KGPF contract,” even though it noted that more than 3,000 plans have terminated the KGPF as a plan offering during the class period. “Mr. Teets has not provided a single example showing the potential waiting period has deterred any of the 13,000 plans represented by participants in the class from withdrawing from the KGPF,” the court noted. “Without any evidence that Great-West has exercised its right or that the right has deterred any plan from exiting the KGPF, summary judgment in favor of Great-West on this issue was appropriate.” As for the ban on competing funds on the menu, the court noted that “Mr. Teets has not even alleged that the competing fund provision has affected his own choice about participation in the KGPF.”
As for setting its own compensation, the appellate court agreed with the determination of the lower court that “…even though it could use the Credited Rate to ‘influence its possible margins,’ the ultimate amount it earns depends on whether participants elect to keep their money in the KGPF each quarter.” The court noted that while plaintiff Teets focused “on Great-West’s (1) contractual right to impose a 12-month waiting period on withdrawing plans and (2) prohibition on plans’ offering comparable investment options to participants, “we conclude that Mr. Teets has not adduced sufficient evidence to create an issue of material fact as to whether either of the foregoing has prevented plans or participants from rejecting a change in the Credited Rate.” Additionally, the appellate court noted that “because Great-West does not have unilateral authority or control over the Credited Rate, it also lacks such control over its compensation,” also affirming the district court’s summary judgment ruling that Great-West was not a functional fiduciary.
The ruling also included some interesting observations in a concurring opinion by Judge Bacharach. While he joined “virtually all of the majority’s thoughtful and persuasive opinion,” he respectfully disagreed only with the analysis regarding the “policy that allegedly prohibits plan sponsors from offering other low-risk funds alongside Great-West’s own Key Guaranteed Portfolio Fund (‘KGPF’).” Though agreeing that Great-West was entitled to summary judgment on those claims, “I do not believe that Mr. Teets bore the burden to present the evidence discussed in the majority opinion,” he wrote.
Disagreeing with the obligation of the plaintiff to show evidence that he or other participants had felt restricted or that they might have invested in comparable funds, but for the non-compete policy, he aligned himself with an argument put forward by Great-West, which he described as “Great-West’s marketplace theory of nonliability.” Essentially, Great-West had argued that while it could set the terms of the product, “it [could not] compel the plan to accept the investment option on those terms over alternatives available in the marketplace.”
Judge Bacharach embraced that argument, noting that, “As alleged by Mr. Teets, the policy serves only to prevent plan sponsors from offering the KGPF if competing funds are also offered; the alleged policy does not affect the availability of Great-West’s general investment platform if the plan sponsor had chosen to offer competing funds in lieu of the KGPF.”
Judge Bacharach goes on to note that, “Mr. Teets responds that Great-West acts as a fiduciary because he cannot personally choose between the KGPF and other competing low-risk funds. But this response blames Great-West for the decision-making of Mr. Teets’s plan sponsor.”
“Mr. Teets assumes that plan sponsors would act as he wishes,” Bacharach continues; “but plan sponsors are not parties, and Mr. Teets points to no evidence that Great-West influences plan sponsors’ selection of investments. Mr. Teets has thus failed to set forth specific facts contesting Great-West’s argument for summary judgment based on a marketplace theory of nonliability.”
Why This Matters
While the role played by Great-West in this case is relatively unique, in considering the claims here, the 10th Circuit (and the district court) spent a considerable amount of their analysis reviewing the circumstances that created fiduciary status (or in this case, failed to do so). Plan fiduciaries are well advised to be aware of these standards, as courts have been known to draw conclusions (and lines of responsibility) that have been known to change, and don’t always mesh with each other, much less the line(s) that you may draw.