On February 3, 2020, the Eighth Circuit Court of Appeals ruled, in Rozo v. Principal, that Principal was a fiduciary with respect to one of its stable value products – the Principal Fixed Income Option (PFIO) – because of (1) its ability (unilaterally) to set the guaranteed rate on the PFIO and (2) the sponsor’s inability (without paying a 5% surrender charge or waiting 12 months) to withdraw from the PFIO, (3) notwithstanding that participants could (individually) withdraw their assets from the PFIO subject only to an “equity wash.”
In this article we very briefly review the decision and consider its implications for plans with stable value options.
Principal’s PFIO is a stable value product that (it appears) is included in a number of plans for which Principal serves as a provider. Plaintiff Rozo brought suit on his own behalf and on behalf of other participants in plans that have invested in the PFIO.
Every six months, Principal resets the guaranteed interest rate on the PFIO. Generally, a month in advance, Principal notifies plan sponsors and participants of the new rate. Participants generally have the right to withdraw their assets from the PFIO at any time, subject to an “equity wash” (prohibiting investment in competing funds for 90 days). Plan sponsors may only withdraw plan assets subject to (as noted) a 5% surrender charge or a 12-month waiting period.
Plaintiff’s claim is that Principal breached its fiduciary duty under ERISA by:
(a) Setting the Guaranteed Interest Rate and/or Composite Guaranteed Rate for its own benefit rather than for the benefit of the Plans and participants; (b) setting the credited rate artificially low; (c) misrepresenting the extent to which the rate was “guaranteed;” (d) failing to disclose its retention of the spread; and (e) charging an excessive disclosed fee in addition to the undisclosed compensation from the spread. (Quoting the District Court decision.)
The case turns on whether Principal is a fiduciary under ERISA.
When does the ability of a stable value provider to set the guarantee rate make it a fiduciary?
Plaintiffs argued that Principal was a “functional fiduciary” by virtue of its ability to set the guarantee rate. The parties agreed that this ability would make Principal a fiduciary if (1) in doing so Principal was “not merely following 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.” (Quoting Teets v. Great-West Life & Annuity Ins. Co.)
Participant choice vs. sponsor choice
The latter point was critical. The lower court quoted the district court decision in Teets on this issue:
[I]f all the circumstances of the alleged ERISA-triggering decision show that the defendant does not have power to force its decision upon an unwilling objector, the defendant is not acting as an ERISA fiduciary with respect to that decision.
The lower court found for defendant Principal, holding that the ability of participants to “‘vote with their feet’ by leaving the PFIO in response to an objectionable [guaranteed rate] set by Principal” satisfied part (2) of the Teets test.
The Eighth Circuit reversed, holding that to satisfy part (2) of the Teets test both the participant and the plan sponsor must have an opportunity to reject the new rate and withdraw (without penalty) from the PFIO.
Implications for plan sponsors
The Eighth Circuit distinguished the facts in Rozo from the facts in Teets – where the defendant insurance carrier won – because “[t]he Teets service provider had a ‘contractual option to impose a 12-month waiting period on plan withdrawal,’ but never exercised it. … Here, Principal imposes the 12-month delay.”
The ability of a plan sponsor to withdraw all plan money from a stable value product is obviously financially much more significant than the ability of individual participants to withdraw their money. Carriers that are not able to impose a 12-month sponsor lock-up after a guaranteed rate reset – because of an interpretation of ERISA that treats that lockup as triggering fiduciary status – may reduce their stable value offerings, to avoid ERISA fiduciary status.
The outcome – for the stable value market – will depend in part on the extent to which other courts adopt the approach the Eighth Circuit has taken or the more relaxed approach taken by certain other courts.
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We will continue to follow this issue.