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Client Alert: Rozo v. Principal: Eighth Circuit expands definition of ERISA fiduciary

Financial, Executive and Professional Risks (FINEX)
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By Anthony Dragone | February 13, 2020

The U.S. Court of Appeals for the Eighth Circuit considers if a service provider qualifies as a fiduciary under ERISA when it offers a 401k plan ensuring a return that it unilaterally calculates.

In Frederick Rozo v. Principal Life Insurance Company,1 the United States Court of Appeals for the Eighth Circuit considered the question of whether a service provider qualifies as a fiduciary under ERISA when it offers a guaranteed investment contract (GIC) 401k plan option ensuring a rate of return that it unilaterally calculates.

In this case, the plaintiff brought a claim against Principal Life Insurance Company (Principal) in its role as service provider for the WEC Employees 401(k) Profit Sharing Plan. The plan is sponsored by the Western Exterminator Co., which was not named as a defendant. As the service provider, Principal would calculate the rate of return, the Composite Crediting Rate (CCR), every six months. Principal would then notify the plan sponsors of the CCR, who would in turn notify the plan participants one month before the CCR went into effect. If a plan sponsor wanted to reject the CCR it must withdraw its funds and then either (1) pay a surrender charge of 5%; or (2) give notice and wait 12 months. A plan participant can exit and withdraw funds but would be prohibited from reinvesting in the plan for three months.

In determining whether Principal qualified as a fiduciary, the Court applied the test laid out by the Tenth Circuit in Teets v. Great-West Life & Annuity Ins. Co.2 Based on Teets, a service provider acts as a fiduciary: if (1) it “did not merely follow a specific contractual term set in an arm’s-length negotiation” and (2) it “took a unilateral action respecting plan management or assets without the plan or its participants having an opportunity to reject its decision.”3

The Court determined that, after applying this test, Principal was a fiduciary. The first prong is satisfied because Principal sets the CCR based on past rates in combination with a new rate that it unilaterally inputs. The Court found that although the contract empowered Principal to set the CCR, the actual rate and rate calculation are not specific terms under the contract. The second prong is satisfied because the withdrawal penalties for both plan sponsors and plan participants impede termination of the relationship with Principal which the Court determined meant that they could not freely reject the decision. As such, the Court held that Principal is a fiduciary exercising control and authority over the CCR and remanded the matter to the lower court.

It is important to note that while the Court used the same test as in Teets, it ultimately reached a different conclusion. While the Court made a concerted effort to explain how the facts of this matter differed from Teets, this resulting circuit split could lead to the U.S. Supreme Court taking up the issue.

Client Takeaways

  • Understand that rules around who is considered a fiduciary are fluid and changing.
  • Having control over plan assets can make one liable as a fiduciary under ERISA, even if a contract governs specific steps of the relationship. Therefore, it is important to review whether any actions are taken in the handling of assets outside of those specific terms.
  • Consult with your legal and insurance professionals to ensure that you have the proper insurance and risk management strategies in place to protect the company.
    • Given the decision in Rozo above, for plan sponsors we recommend reviewing your fiduciary liability policy and for service providers we recommend reviewing your E&O policy. That said, a full review of the entire risk management portfolio is always prudent when a new court ruling increases potential exposure.

Willis Towers Watson hopes you found the general information provided in this publication informative and helpful. The information contained herein is not intended to constitute legal or other professional advice and should not be relied upon in lieu of consultation with your own legal advisors. In the event you would like more information regarding your insurance coverage, please do not hesitate to reach out to us. In North America, Willis Towers Watson offers insurance products through licensed subsidiaries of Willis North America Inc., including Willis Towers Watson Northeast, Inc. (in the United States) and Willis of Canada, Inc.

1 No. 18-3310 (8th Cir. 2020).
2 921 F.3d 1200 (10th Cir. 2019).
3 Id. At 1212.

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