Principal Life Insurance Co. acted as an ERISA fiduciary when setting a guaranteed rate of return for one of its investment funds, according to a recent decision by the 8th US Circuit Court of Appeals (Rozo v. Principal Life Ins. Co., No. 18-3310 (8th Cir. Feb. 3, 2020). The court found that Principal met both parts of a two-pronged test applied by other courts to determine fiduciary status. The case now heads back to the district court, which will decide whether Principal breached its fiduciary duties when setting the rate.
The plaintiffs invested in the Principal Fixed Income Option (PFIO) fund through their employers’ 401(k) plans. Every six months, Principal determined the PFIO’s guaranteed rate of return, known as the composite crediting rate (CCR). Sponsors couldn’t challenge the CCR, but they could withdraw from the fund if they objected to the rate — either immediately, subject to a 5% surrender charge, or for free after a one-year waiting period. Participants could immediately withdraw their funds but had to wait three months before investing in similar funds.
The plaintiffs claimed that Principal breached its fiduciary duty by setting the CCR at a low rate, allowing the company to benefit from a larger spread between the actual investment return on plan assets and the guaranteed rate. The district court granted summary judgment for Principal, finding that the insurer was not a fiduciary because it was only following contractual terms when setting the rate.
Under ERISA, individuals act in a fiduciary capacity to the extent they exercise any discretionary authority or control over the management of a plan or its assets. To determine if Principal acted as a fiduciary when setting the CCR, the 8th Circuit looked to a two-part test discussed in Teets v. Great-West Life & Annuity Ins. Co., 921 F.3d 1200 (10th Cir. 2019)). Under that test, a service provider acts as a fiduciary if the provider meets both prongs:
The 8th Circuit ruled that Principal was a fiduciary under this test. Although the contract called for Principal to set a new CCR every six months, the court found Principal exercised discretion when setting the CCR because the rate itself was not a specific term of the contract. Further, the court found the punitive conditions on withdrawal from the fund prevented the plan from freely rejecting a CCR, even though the parties agreed to those conditions in the contract. Accordingly, the 8th Circuit remanded the case to the district court to determine if Principal breached its fiduciary duties when setting the CCR.
The 8th Circuit’s decision may come as a surprise to employers familiar with the Teets case. Teets involved a similar issue — whether an insurer (Great-West) acted as a fiduciary when setting the rate of return for one of its stable value funds. The 10th Circuit found that Great-West didn’t act in a fiduciary capacity when setting the rate for its fund. But the 8th Circuit found a key difference between the two cases. In Teets, the contract allowed — but didn’t require — Great-West to impose a 12-month delay on the plan’s withdrawal from the fund.
This fact was critical to the 10th Circuit’s decision. Because fiduciary status arises only to the extent a person exercises discretionary control over a plan, the 10th Circuit concluded that the mere option to impose a withdrawal penalty — without any certainty it would be exercised — is insufficient to create fiduciary status. But in Principal’s case, the plan knew with certainty from the contract terms that withdrawal would trigger the penalty.