Charges that a provider’s advice arrangement with Financial Engines constituted a fiduciary breach have been rejected by a second judge in an Illinois federal court.
The lawsuit, filed a little more than a year ago in the U.S. District Court for the Northern District of Illinois, had alleged that at defendant Hewitt Associates’ urging, plaintiff Cheryl Scott, a retiree and participant in the Caterpillar Plan – “and thousands like her in the Caterpillar Plan and other similarly-situated retirement plans for which Hewitt provided recordkeeping services” – purchased retirement investment advisory services for a “hefty fee.” The suit had alleged that “…at no time during the period when Financial Engines was providing investment advice directly to Caterpillar Plan participants did Hewitt directly notify Ms. Scott or other similarly-situated Plan participants that Hewitt was taking a 20-25% kickback on the amounts paid to Financial Engines for ‘managed services,’” though that was disclosed in filings with the Labor Department.
In what U.S. Magistrate Judge Jeffrey T. Gilbert described (Scott v. Aon Hewitt Fin. Advisors, LLC, 2018 BL 92715, N.D. Ill., No. 1:17-cv-00679, order granting motion to dismiss 3/19/18) as the “gravamen” of the complaint was that Hewitt and Financial Engines agreed to a “pay to play” or improper kickback scheme in which Financial Engines, in exchange for being chosen as the plan’s investment advisor under the Financial Engines Program or for providing subadvisory investment services under the AFA Program, agreed to kick back or share with Hewitt and AFA a significant portion of the fees charged for the automated investment services and collected from the individual plan participants in violation of ERISA.
For their part, the defendants argued that the plaintiff failed to state a claim, that Hewitt was not a fiduciary for the plan, and that neither Hewitt nor AFA acted as a fiduciary with respect to Hewitt’s receipt of fees, or the retention of Financial Engines as subadvisor. They also said that the defendants prohibited transaction and self-dealing claims were insufficient, and that the non-fiduciary liability claim should be dismissed because she failed to allege a “predicate” prohibited transaction.
And – as it turned out – Judge Gilbert was largely inclined to agree.
While plaintiff Scott argued that Hewitt acted as a fiduciary because it purportedly exercised control over Caterpillar’s retention of Financial Engines under the Financial Engines Program, Judge Gilbert observed that, “…nowhere in her complaint does Scott allege that Hewitt is identified as a fiduciary in any Plan documents, and Scott's conclusory allegations that Hewitt controlled Caterpillar's decision to engage Financial Engines are contradicted by the Hewitt/Financial Engines Master Service Agreement.”
Writing Trumps Words
Explaining that in “…deciding a motion to dismiss, a court is required to construe the facts alleged in the complaint and all reasonable inferences in the light most favorable to the plaintiff,” and that the “well-settled rule” is that “when a written instrument contradicts allegations in a complaint to which it is attached, the exhibit trumps the allegations,” Judge Gilbert turned to the Hewitt/Financial Engines Master Service Agreement. He noted that “the language of the Hewitt/Financial Engines Master Service Agreement makes it clear that Caterpillar, and not Hewitt, retained the sole and final authority to decide whether to hire Financial Engines,” and that “in light of the language of the Hewitt/Financial Engines Master Service Agreement, and nothing to the contrary in the record except Scott’s bald allegations of ‘control,’ the Court concludes Caterpillar had sole authority to select and hire Financial Engines, and it is not plausible on this record that Hewitt had any final authority or control over the selection and hiring of Financial Engines.” Indeed, Judge Gilbert noted that, “there is nothing to indicate, other than Scott’s bare and conclusory allegations, that Hewitt exercised discretionary authority over the Plan or its assets, and those bare and conclusory allegations are not enough to survive a motion to dismiss.”
Gilbert noted that plaintiff Scott “also seems to argue that Hewitt breached its fiduciary duty by receiving excessive fees for the services it provided,” but citing a comparable case, noted that the court there determined that defendant (Xerox) had not acted as a fiduciary when it engaged in the conduct that the plaintiffs challenged. “The same is true in this case, and Scott makes no attempt to explain how Hewitt’s arms’ length negotiations with Financial Engines to provide data transmission and technological services to Financial Engines under a separate contract constitutes an exercise of discretionary authority over the Plan or Plan assets,” he wrote.
“Accordingly, for all of these reasons, the Court is not persuaded by any of Scott’s arguments in support of her claims that Hewitt is a fiduciary or has a fiduciary duty to her and the Plan participants,” Judge Gilbert concluded, going on to dismiss those claims, but without prejudice, allowing the plaintiff to file an amended complaint.
Fiduciary Finding
Though AFA was a fiduciary to the plan for the purpose of providing investment advice to the participants, “…that does not make AFA a fiduciary for all purposes,” Gilbert wrote. Moreover, he wrote that, in order to state a claim that a service provider to an ERISA-governed plan breached a fiduciary duty by charging plan participants excessive fees, a plaintiff “first must plead facts demonstrating that the provider owed a fiduciary duty to those participants.” Citing Hecker v. Deere, Gilbert explained as “well-established that a service provider who negotiates its own compensation with a plan fiduciary at arm’s length is not a fiduciary for that purpose.”
Judge Gilbert also cited a “nearly identical case” filed by the same attorneys representing the plaintiff here (Patrico v. Voya Fin., Inc., 2017 U.S. Dist. LEXIS 95735 , 2017 WL 2684065 (S.D.N.Y. June 20, 2017 ), noting not only the result (granted motion to dismiss, since defendants were not ERISA fiduciaries with respect to the fees charged for the investment advice service), but the rationale. “Similar to Patrico, AFA did not unilaterally control the compensation it would receive because Caterpillar was free to select a different investment advice service provider or none at all,” he wrote.
Another similarity: the fees were tied to the number of plan participants and the balance of plan assets, neither of which were controlled by the advice provider. “This Court is persuaded by the court’s analysis in Patrico and concludes that AFA was not a fiduciary when it negotiated at arm’s length with Caterpillar and did not have control over its compensation.” In essence, Judge Gilbert determined that in this case AFA was a fiduciary only for the purpose of providing investment advice, and could therefore only be liable for a breach of fiduciary duty in that context. Judge Gilbert also dismissed these claims, again without prejudice.
‘Reasonable’ Reasoning
Finally, Judge Gilbert turned his attention to allegations that Hewitt and AFA engaged in prohibited transactions in violation of ERISA § 406(a)(1)(C) by receiving compensation “in connection with Financial Engines’ services to the Plan and their participants” that was “excessive and unreasonable.” He began his analysis noting that in order to state a claim under § 406(a)(1)(C), a plaintiff must allege that the transaction in question was “between the plan and a party in interest,” and that the plaintiff also had to allege that a plan fiduciary “caused the plan to engage in the allegedly unlawful transaction.”
Judge Gilbert noted that the claim against Hewitt was “problematic” in that it challenged a transaction between Financial Engines and Hewitt, rather than a transaction involving a party in interest with the plan. “Nowhere in her complaint does Scott allege any facts that the Plan paid any fees to Hewitt in connection with the Financial Engines Program,” he wrote, once again turning to the Patrico decision that confronted a similar structure. He also cited other cases dismissed where the “challenged transaction lacked the requisite involvement of a plan fiduciary and use of plan assets” – dismissing this claim, also “without prejudice.”
As for the issue of whether the fee was reasonable, after some discussion on the issue, Judge Gilbert concluded that the allegations were “not sufficient to raise the right to relief above the speculative level at this point without more.” He also noted that he was unable to find any factual evidence that the fees were excessive relative to the market beyond the “conclusory allegations,” again dismissing the claims without prejudice.
On the issue of a failure to state a claim on § 406(b)(3), Judge Gilbert noted that a service provider “cannot be held liable for merely accepting previously bargained-for fixed compensation that was not prohibited at the time of the bargain,” and that “the disputed transaction is AFA’s payment for its work; there is no payment from Financial Engines to AFA.”
Finally, Judge Gilbert pushed aside allegation that, even if Hewitt and AFA otherwise were not fiduciaries, they still are liable under ERISA § 502(a)(3) for “knowingly participating in and/or receiving the benefits from the prohibited transactions of other fiduciaries.” Gilbert noted that, having already concluded that the plaintiff failed to allege sufficient facts to support her claims that Hewitt and AFA’s transactions with Financial Engines were prohibited transactions, she also failed to make the case on this basis.
