Plan fiduciaries are becoming more aware of the increased scrutiny being placed on the vendors who provide services to ERISA-covered retirement plans. There is a renewed focus on what is considered a “reasonable arrangement” for fees and services with new disclosure requirements under ERISA 408(b)(2) that became effective in July of 2012. The spotlight on service providers and their services and fees, however has actually overshadowed the ultimate responsibility of plan fiduciaries: to ensure their plans are being operated solely in the best interest of the plan’s participants and beneficiaries.
Recent Court case findings with regard to fiduciary status
A recent U.S. District Court case, Santomenno v. John Hancock,1 – emphasized the vital role that plan fiduciaries play in exercising authority and control in the management and operation of the plan, which entails having a thorough understanding of the services provided and the fees being charged.
In this court case, the plaintiffs questioned whether or not John Hancock had breached its fiduciary duties by:
1) Charging excessive fees
2) Improperly receiving revenue-sharing payments
3) Improperly selecting their own money market account (JHT-Money Market Trust) as an investment option
The Court’s findings were:
1) John Hancock was not a fiduciary regarding its fees. Relying on a third circuit case, the district court stated that the service provider “owe[d] no fiduciary duty with respect to the negotiation of its fee compensation . . .”2 In this case, John Hancock fully disclosed its fees, and the trustees were “free to seek a better deal with a different 401(k) service provider if [they] felt that [the] investment options were too expensive.
2) John Hancock was not a fiduciary regarding revenue-sharing payments. Service providers do not “become fiduciaries merely by receiving shared revenue,” especially when “the total expense of the investment was accurately disclosed” to the plan participants. Fees and total expenses associated with each investment option were fully disclosed to the plan trustees and plan participants. The trustees and plan participants chose to invest in those options in spite of the fees. The fact that John Hancock and the mutual fund managers chose to allocate those fees in a particular way after being paid does not make John Hancock a fiduciary.
3) John Hancock was not a fiduciary regarding the selection of the proprietary JHT-Money Market Trust as an investment option, and was free to design various investment menus to offer to prospective clients who could then decide whether or not to contract for those services. It was the trustees, not John Hancock, who had the final say on which investment options to include in the plans. John Hancock did not have ultimate authority over which investments were included in the plans.
Therefore, based on the findings, John Hancock was not acting as a fiduciary because the services it offered to Danielle Santomenno where not done so as a fiduciary duty.
Why does it matter?
With each allegation in the John Hancock case, the Court decided that they were not an ERISA fiduciary based on the actions taken. The case highlighted instead that it is the plan fiduciary that has the critical role to make sure the plan is being managed efficiently with necessary services and reasonable compensation on behalf of the participants and their beneficiaries.
How can we help?
It is fundamental that fiduciaries have the ability to obtain information sufficient to enable them to make informed decisions about an employee benefit plan’s services, the costs of those services, and the service providers. When a fiduciary makes prudent and proper decisions, the plan will be strengthened, which ultimately benefits the participants.
Contact us to learn more about how our Vendor Services team can help you select and monitor your service providers.
1No. 11-2520, 2013 U.S. Dist. LEXIS 103404 (D. N.J. July 24, 2013).
2Renfro v. Unysis Corp., 671 F.3d 314 (3d Cir. 2011).
PCI’s archived blog entries are dated, the rules and statutes referenced may have changed. The analysis or guidance within these blog entries may have become stale, dated, or no longer accurate. PCI will not update or change these entries to reflect the latest analysis or development.
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