Déjà vu All Over Again in Voya Fiduciary Suit

A participant suit alleging that a recordkeeper’s advice arrangement with Financial Engines constituted a breach of fiduciary duty has been dismissed – again.

Plaintiff Lisa Patrico, a participant in the Nestle 401(k) Savings Plan, had filed a class action suit against Voya, the recordkeeper for the plan, alleging that Voya devised an arrangement with Financial Engines in which it collected excessive fees for investment advice services and concealed “the true nature of the arrangement.”

First Filing

However, in June 2017 Judge Lorna G. Schofield of the U.S. District Court for the Southern District of New York (Patrico v. Voya Fin., Inc., 2017 BL 212065, S.D.N.Y., No. 1:16-cv-07070-LGS, 6/20/17) dismissed both claims of a fiduciary breach (by charging unreasonable and excessive fees for services provided by Financial Engines) “because the Complaint fails to allege facts showing that Defendants were ERISA fiduciaries with respect to their fees.”

Judge Schofield cited a case in the 2nd Circuit that held that when a service provider that has no relationship to an ERISA plan is negotiating a contract with that plan, the service provider “is not an ERISA fiduciary with respect to the terms of the agreement for [its] compensation.” At the time, Judge Schofield did give the plaintiffs an opportunity to file an amended complaint.

FAC ‘Checked’

Well that’s what they did (Patrico v. Voya Fin., Inc., 2018 BL 85185, S.D.N.Y., No. 1:16-cv-07070-LGS, order denying leave to amend 3/13/18) – and once again Judge Schofield reviewed Patrico’s First Amended Complaint (FAC). However, she noted that while “the FAC elaborates on Defendants’ conduct alleged in the dismissed Complaint, but the gravamen of Plaintiff’s claims is unchanged.”

She began her analysis by noting that “the viability of Counts II, IV, V and VI depends on whether Voya Institutional and VRA (Voya Retirement Advisors, LLC) were acting as fiduciaries with respect to the challenged conduct – negotiating and paying/receiving VRA’s fees under the Nestle-VRA Agreement.” She then proceeded to outline specific allegations; that Voya Institutional and VRA breached their fiduciary duties (as co-fiduciaries with Nestle) by knowingly participating in Nestle’s alleged breach of fiduciary duty, that Voya Institutional and VRA engaged in a prohibited transaction as fiduciaries by paying themselves excessive fees in accordance with the Nestle-VRA Agreement, and that VRA breached its fiduciary duty of loyalty by failing to disclose to Plan participants that its fee was excessive.

“Despite these claims,” she wrote, “the proposed FAC fails to allege any facts that would result in Voya Institutional or VRA being a fiduciary with respect to VRA’s fees, either during the negotiation or after the execution of the Nestle-VRA Agreement. As a matter of law, neither Defendant was acting as a fiduciary while negotiating VRA’s fees.”

Judge Schofield went on to note that “neither Defendant was acting as a Plan fiduciary when it paid and/or accepted Plan assets as payment for services rendered under the Nestle-VRA Agreement because neither Defendant exercised any discretion or control over the amount of VRA’s fees, which was set by a pre-determined formula over whose inputs neither Voya Institutional nor VRA had any control.” And while the plaintiff here had argued that under the terms of the Nestle VRA Agreement, VRA was an express fiduciary, i.e., that the Nestle-VRA Agreement expressly required VRA to act in compliance with ERISA as if it were a fiduciary, but under that agreement VRA was designated as a fiduciary only “with respect to the services provided” in its capacity as an investment manager for the plan. “This language cannot reasonably be construed as conferring on VRA fiduciary status with respect to its own fees.” Judge Schofield also rebuffed the notion that VRA’s responsibility for paying over compensation to Financial Engines constituted and exercise of “discretion or control over the amount of VRA’s fees under the Nestle-VRA Agreement, or undermines the conclusion that Nestle was the ultimate decision-maker with respect to VRA’s fees.”

‘Duty’ Bond?

Moreover, while the plaintiff had argued that Voya Institutional and VRA were fiduciaries with respect to the Plan and VRA’s fees because each played a role in the appointment of a fiduciary, Schofield stated that Voya Institutional and VRA “did not owe a duty to the Plan during the negotiation of the Administrative Services Agreement or the Nestle-VRA Agreement and therefore they cannot be held liable for any role they played in the appointment of Financial Engines and/or VRA under those Agreements.” And even if they were held to be fiduciaries by virtue of their appointment of another fiduciary, Schofield wrote that the challenged conduct – “their payment and/or receipt of excessive fees – is not sufficiently related to give rise to fiduciary liability.”

Finally, Judge Schofield said that, “even if, as the FAC alleges, Voya Institutional and VRA leveraged the difficulty and expense of switching Plan recordkeepers to influence Nestle’s decision to engage VRA and Financial Engines, the FAC does not allege any facts to support the inference that the decision to engage VRA and Financial Engines was not ultimately Nestle’s to make.”

And then she noted that Count III alleged that VRA engaged in a prohibited transaction under ERISA § 406(b)(2) based on VRA’s “conduct in marketing Financial Engines’ services” to the plans for a fee. “This claim also would be futile because the FAC does not plead sufficiently that VRA was a fiduciary with respect to the challenged action,” she wrote.

Judge Schofield explained that any fiduciary breach claim challenging the investment fees should be brought against Nestle USA, the sponsor of the 401(k) plan, since Nestle “retained ultimate authority to accept or reject the proposed terms.”

As for this motion for leave to file an FAC, it was “DENIED as futile because none of the claims could survive a motion to dismiss.”

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