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Prudential Prevails Again Over Pay-to-Play Allegations

The 2nd U.S. Circuit Court of Appeals has affirmed a lower court’s ruling dismissing prohibited transaction and fiduciary breach claims against Prudential over the use of revenue sharing, allegedly excessive fees and a so-called “pay-to-play” arrangement.

In Rosen v. Prudential Ret. Ins. & Annuity Co., plaintiff Richard Rosen, on behalf of himself and similarly situated participants in the Ferguson Enterprises, Inc. 401(k) Retirement Savings Plan, appealed to the 2nd Circuit following dismissal by the U.S. District Court for the District of Connecticut.


Prudential was selected by Ferguson Enterprises as the service provider for its 401(k) plan. Before appointing Prudential, Ferguson and its investment advisor had agreed on the investment menu and the terms that govern the management of plan assets, and arranged for Prudential to be compensated by fees paid directly from the plans it manages or indirectly through revenue-sharing arrangements entered into between Prudential and the mutual funds.

Two investment vehicles at issue in the case are the Ferguson Enterprises, Inc. Retirement Savings Plan Trust and Group Annuity Contracts that Prudential entered into with the plan to establish separate accounts, consisting of independent investment options offered by the service provider that pool and reinvest assets from multiple plans.

Original Claims

The original suit filed in 2015 and amended in 2016 took issue with both the composition of the plan’s investment options and Prudential’s revenue-sharing arrangements with mutual funds. Specifically, the plaintiffs challenged:

  • the concentration of actively managed mutual funds offered as part of the plan’s menu;

  • Prudential’s alleged “self-dealing” through its receipt of revenue sharing payments in exchange for investing plan assets in mutual funds; and

  • the inclusion of Prudential’s GoalMaker product in the plan, which they claimed steers participants into high-cost investment options to the benefit of Prudential and against the best interests of plan participants.

In granting Prudential’s earlier motion to dismiss on the ground that it was not acting in an ERISA fiduciary capacity when it received any such payments, the district court held that while Prudential may qualify as a fiduciary with respect to the separate accounts, Rosen failed to adequately plead a breach of fiduciary duty.

Plan Trust Agreement

Reviewing the summary judgment order de novo (as a first review), the appeals court agreed with the lower court’s determination that Prudential was not a fiduciary in its role as directed trustee of the trust assets because it did not hold “discretionary authority” over the trust.

The court noted that the agreement specifically withholds from Prudential the sort of discretionary responsibilities that create fiduciary status and that the employer (Ferguson) retained final contractual authority over any changes to the funds available to the trust.

Separate Accounts

The court noted that while Prudential possesses at least some discretionary authority over the investments and could potentially become a fiduciary even if the authority is not exercised, the plaintiff’s argument fails because it does not allege a fiduciary breach with respect to the separate accounts.

“In order to survive a motion to dismiss, Rosen must plausibly allege that Prudential engaged in conduct constituting a breach of an ERISA fiduciary duty while acting within its capacity as plan fiduciary,” the court noted.

The court then addressed Rosen’s prohibited-transaction allegations, noting that fee-sharing arrangements between service providers and third party managers do not necessarily create a violation of ERISA. Rosen “does not allege that Prudential received payments from the separate accounts without Ferguson’s consent or knowledge, and does not distinguish between ordinary compensation for services in the form of revenue-sharing payments and illicit kickbacks,” the judges wrote.

Moreover, they note that Rosen’s allegations of a breach of the duties of prudence and loyalty fare no better under the court’s pleading standard. “Rosen adduces no facts to show that a prudent fiduciary would have acted differently in managing the separate accounts,” the panel said.

“Most importantly, the loyalty-based allegations that the revenue-sharing payments were ‘fraudulently and deceptively concealed’ are contradicted by documents incorporated into the amended complaint,” the judges wrote.

The bottom line: Lacking discretionary authority over the plan assets, Prudential was not a fiduciary, and thus could not be found to breach a fiduciary duty to the plan or its beneficiary/defendants. In that area, and in the one area where they might have been found to have discretion (the separate accounts), the plaintiff failed to allege a violation. These were basically the same defects identified by the district court in its dismissal, and now affirmed by the appellate court.

Plaintiffs have been known to adjust their complaints to cure such defects, of course.