When Retirement Plan Service Providers Are Considered Fiduciaries

Last Updated: June 17, 2014

There are two ways one can become an ERISA fiduciary: (1) by being specifically named in the plan document, or (2) by actions that illustrate fiduciary by function. Normally, an employer, a retirement committee, or some other specific plan administrator is designated through option (1). As for (2), however, the possibilities of who can become a fiduciary are often a bit more open-ended. As employers and sponsors of a retirement plan, it’s important to fully understand the contracts between the plan and service provider and to have full knowledge of what parties are a fiduciary to the plan.
In ERISA claims—especially in the context of fee litigation—courts will look at the actions of those in contact with the plan to determine fiduciary status, including the actions of service providers. Most recently, the United States District Court of Massachusetts determined that fiduciary status did exist for insurance company MassMutual in Golden Star, Inc. v. Mass Mutual Life Insurance Company1.  The reasons for the court’s decision focused on the determination of compensation and the contract language between MassMutual and Golden Star, Inc.
The Facts
  • MassMutual and Golden Star, Inc. entered into a Group Annuity Contract (GAC), which stated:
(1) MassMutual legally owns the separate investment accounts (SIAs) in which plan participants invest, and these SIAs are used to keep retirement contributions separate from other assets, in compliance with ERISA and state law; (2) MassMutual has “exclusive and absolute ownership and control” of the assets in the SIAs; and (3) “All assets of MassMutual are invested by MassMutual as it, in its sole discretion, may determine, subject to applicable laws and regulations including, but not limited to, the discontinuance of a Separate Investment Account.”2 (4) The GAC permitted MassMutual to set and assess SIA management fees at a rate up to 1.0% of the average daily market value of the separate account. MassMutual maintained rates from 0.0 to 1.0%.3
  • MassMutual had Participation/Services Agreements with third-party mutual funds. The agreements provide for MassMutual’s receipt of revenue sharing payments (RSPs) based on the expense ratio charged by the mutual funds for the separate accounts. Different share classes have different expense ratios, so some share classes resulted in higher RSPs.4
The Claim
  • MassMutual claimed that RSPs from the third-party mutual funds are used to offset fees and other payments that would otherwise be collected from the Golden Star, Inc. Plan/participants for compensation for management of the SIAs.
The Argument
  • Golden Star, Inc. argued that these payments exceeded the actual costs of the Plan and were effectively “kickbacks” that resulted in a prohibited transaction and fiduciary breach under ERISA.5
Applicable Areas of Law
  • The two areas of functional fiduciary triggered in this case are ERISA 3(21)(i) and 3(21)(iii):(i) He exercises any discretionary authority or discretionary control respecting management of such plan or exercises any authority or control respecting management or disposition of its assets,(iii) He has any discretionary authority or discretionary responsibility in the administration of such plan.6
1 No. 3:11-cv-30234-PBS (D. Mass., May 20, 2014), available at 2 Id. at *3. 3 Id. 4 Id. at *4. 5 Id. at *2, *4. 6 ERISA §3(21); 29 U.S.C. §1002(21) (2012).
The court determined that the GAC’s language gave MassMutual discretionary authority, and therefore MassMutual was a fiduciary by action. MassMutual was determined to have discretionary authority because the contract allowed MassMutual to determine its own compensation, take fees out of separate accounts, and offset revenue sharing payments against management fees as compensation; and because MassMutual retained discretionary control to govern its own fee after entering into an agreement with Golden Star, Inc. for administration of the plans7. The court did not, however, find any fiduciary status with respect to MassMutual’s ability to “add, delete, or substitute the mutual funds available on the Plan Menu” because (1) MassMutual did not exercise this authority; instead, (2) Golden Star, Inc. exercised the final say on changes to the investment menu8.  Similar to other courts who have dealt with this issue, the court found that having authority to change an investment lineup doesn’t confer fiduciary status if the service provider in question doesn’t exercise that authority9. In addition to finding that MassMutual was a fiduciary, the additional key takeaways are: – As a fiduciary, MassMutual was subject to ERISA and could not engage in prohibited transactions. Therefore, if MassMutual had passed through all RSPs, there would be no issue because they would not be able to be accused of engaging in a prohibited transaction. Thus, there would be no alleged fiduciary breach. Because this case merely turned on the determination of fiduciary, such an issue of prohibited transactions, the appropriateness of RSPs received, and breach would be determined later. – Had MassMutual not had the discretion in their contract to determine their own compensation and to change fees, they likely would not have been determined to be a fiduciary. The terms of the GAC controlled the determination in this case. This case could easily turn on appeal, as there are plenty of cases to support MassMutual’s contention that they are not a fiduciary. That being said, this case illustrates how a service provider not normally seen as a fiduciary can become a fiduciary based on not only the discretion it retains, but how it exercises that discretion. As employers and plan sponsors, it is important to understand the contracts entered into with service providers; it is equally important to understand the payments and fees associated with such contracts. Understanding what triggers fiduciary status—as well as fee transparency and understanding RSPs—is important in the prudent administration of a retirement plan. If you have any questions about fee transparency and RSPs, functional fiduciaries, or about this case, please contact our ERISA Services Team.
7Golden Star, Inc., at *19. 8Id. 9See, e.g., Hecker v. Deere, 556 F.3d 575, 583 (7th Cir. 2009); Leimkuehler v. American United Life Ins. Co., 713 F.3d 905 (7th Cir. 2013) (holding the discretion to select the mutual fund share class for a plan’s investment lineup while not actively exercising this discretion conferred no fiduciary status on the service provider).
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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