A participant suit that had alleged that a recordkeeper’s advice arrangement with Financial Engines constituted a breach of fiduciary duty has been dismissed.
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.”
However, 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.”
Judge Schofield pointed out that “Nestle was free to select a different investment advice service provider or none at all,” and that therefore “defendants could not have unilaterally controlled the compensation they would receive under the Nestle-VRA Agreement.” Instead, she noted that “Nestle ... selected the investment advice service as an optional benefit from the menu of services offered by Voya for the benefit of Plan participants.”
She went on to note the plaintiff’s argument that Voya controlled their compensation by controlling the proportion of the fee that went to Financial Engines, and in that regard were ERISA fiduciaries, but found that argument to be “unpersuasive.” She explained that the Nestle-VRA Agreement disclosed Financial Engines as the ultimate source of the investment advice, “so Nestle exercised final authority over this arrangement and was free to reject it or seek better terms,” and thus the “defendants were not ERISA fiduciaries with respect to any fee splitting arrangement with Financial Engines.” Second, she noted that “once the rate of compensation was set by the Nestle-VRA Agreement, nothing in that agreement or ERISA prevented VRA from reducing its costs in administering the program.”
“Because Defendants are not ERISA fiduciaries with respect to the fees charged for the investment advice service, they cannot be held liable under ERISA for breach of fiduciary duty with respect to those fees.” She went on to explain that “Financial Engines is not an ERISA fiduciary with respect to the fees for the same reasons — namely that it does not have the requisite control over the amount of compensation it receives.”
She concluded by acknowledging that while Nestle was a named fiduciary under the plan, “the Complaint does not allege that Nestle knew the compensation under the Nestle-VRA Agreement was excessive, either overall or as to the portion retained by VRA,” and that “because the Complaint fails to allege that any ERISA fiduciary had actual or constructive knowledge that the fees paid to VRA are excessive, Plaintiff’s prohibited transaction claim is dismissed.”
Judge Schofield did, however, give the plaintiffs an opportunity to file an amended complaint.
Suits making similar claims about the fee arrangements between Financial Engines and other recordkeepers include Hewitt and Xerox HR Solutions Inc.
