Prudential wins appeal of 401(k) fee lawsuit

The case serves as a reminder to 401(k) record keepers that they may be considered fiduciaries even without exercising discretion over plan assets

Oct 12, 2017 @ 1:40 pm

By Greg Iacurci

+ Zoom

Prudential Financial Inc. has again won a lawsuit alleging it breached its fiduciary duties by receiving revenue-sharing payments from investment options in a client's 401(k) plan.

The lawsuit, Rosen v. Prudential Retirement Insurance and Annuity Co., was dismissed in December in Connecticut district court. The sponsor of the roughly $1.3 billion 401(k) plan, Ferguson Enterprises Inc., as well as an investment adviser, CAPTRUST Financial Advisors, were defendants in that suit.

A three-judge panel in the U.S. Court of Appeals for the Second Circuit affirmed the district court's decision.

James Miller, an attorney at Shepherd, Finkelman, Miller & Shah representing the appellant, Richard A. Rosen, a former employee at Ferguson Enterprises, didn't return a request for comment.

James Shearin, an attorney at Pullman & Comley representing Prudential, also didn't return a request for comment.

(More: Jerry Schlichter's fee lawsuits have left an indelible mark on the 401(k) industry)

There were two investment vehicles at issue in the appeal: the Ferguson Enterprises, Inc. Retirement Savings Plan Trust, as well as group annuity contracts, according to the decision.

DIRECTED TRUSTEE

The circuit judges — Dennis Jacobs, José Cabranes, and Richard Wesley — found that Prudential wasn't a fiduciary under the Employee Retirement Income Security Act of 1974 when serving as "directed trustee" of the trust assets.

"That [trust] agreement specifically withholds from Prudential the sort of discretionary responsibilities that create fiduciary status," the judges stated in their decision.

However, the judges said Prudential possesses "at least some discretionary authority" over investments made in separate accounts established under the group annuity contracts.

Prudential argued it didn't receive revenue-sharing payments from any investments in the separate account, and therefore couldn't have been acting as a fiduciary; but appellate judges, citing district courts in the 2nd circuit, said "mere possession of the discretion to make substantive changes to investments within an account, even if such discretion is never exercised, can transform Prudential into a fiduciary with respect to those specific accounts."

The point was moot, though, because the complaint didn't allege a breach concerning the separate accounts, the judges said.

FIDUCIARY REMINDER

Duane Thompson, senior policy analyst at fi360 Inc., a fiduciary consulting firm, said the case "serves as a helpful reminder to record keepers that in the states of New York, Vermont and Connecticut [the 2nd Circuit] a record keeper holding discretion over plan assets, whether using that authority or not to make investment decisions, is held to fiduciary status."

However, Mr. Thompson said courts are divided on the issue — the appellate court judges, for example, cited an Iowa case (McCaffree Fin. Corp. v. Principal Life Ins. Co.) that found unless a service provider actually uses its discretionary authority to make investment decisions, it is not a fiduciary.

Ultimately, though "on a scale of 1 to 10, this decision is around a 2 on the ERISA Richter Scale," Mr. Thompson said. "It is not earthshaking since it reaffirms case law in the 2nd circuit and doesn't appear to plow new legal ground."

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