Principal Prevails in PFIO Excessive Fee Suit

Principal Life Insurance Co. has won summary judgment in a case that had alleged the firm took excessive profits from the guaranteed investment products it sells to 401(k)s.

The decision (Rozo v. Principal Life Ins. Co., S.D. Iowa, No. 4:14-cv-00463-JAJ, order granting defendant’s motion for summary judgment 9/25/18) resolves claims brought initially by plaintiff Frederick Rozo, and subsequently as a class action on behalf of retirement plan participants who invested in Principal’s Principal Fixed Income Option (PFIO) plan, alleging that: (1) Principal’s discretionary control of the CCR renders it a functional fiduciary over participants’ plan assets; and (2) Principal violated ERISA by retaining compensation (the margin) it was not entitled to as a fiduciary. In an amended complaint, Rozo had argued that even if Principal was not deemed to be a fiduciary, it might still be liable as a nonfiduciary “party in interest” providing services to an employee benefit plan.

However, Chief Judge John A. Jarvey of the U.S. District Court for the Southern District of Iowa held that Principal didn’t act as an ERISA fiduciary with respect to its ability to set the interest rate credited to the participants in its guaranteed investment funds, or as to its own compensation – and that, “If Principal is not a fiduciary, Counts I and II fail as a matter of law.” His rationale for that determination was that Principal announces the new rates in advance, allowing both plan sponsors – and ultimately plan participants – both time and the ability to “vote with their feet.”

As for the third count, Chief Judge Jarvey found that since Principal was not a fiduciary, the plaintiff Rozo bore the burden of proof in establishing that the arrangement created a prohibited transaction. Indeed, he noted that the plaintiff’s argument “boils down to an allegation that Principal engaged in prohibited transactions under ERISA by executing its assigned duties as described by the Contract without knowledge that using the Contract to perform those duties was unlawful because its compensation – also detailed in the Contract – was unreasonable.” And further – ostensibly because the plaintiff relied on a precedent that involved a fiduciary’s “culpability” – Judge Jarvey commented that “Rozo does not explain how Principal knew or should have known its use of the Contract was unlawful.”

“For the reasons stated above, all three counts fail as a matter of law and Principal is entitled to summary judgment,” he concluded.

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