Adding to the ranks of ERISA class action decisions this year, last month the Third Circuit issued an important decision in which it affirmed the dismissal of a putative class action against John Hancock and its affiliates that alleged the insurer had become a “functional fiduciary” under ERISA.
In Santomenno v. John Hancock Life Ins. Co., No. 13-3467 (3d Cir. Sept. 26, 2014), the putative class members were participants in certain 401(k) plans, which are defined contribution plans under ERISA. John Hancock provided the plan participants with investment options. Significantly, however, it was a trustee for each plan who selected the offerings to plan participants from the mututal fund options provided by John Hancock. John Hancock played other roles as well. For instance, it provided plan trustees with a Fiduciary Standards Warranty, pursuant to which John Hancock warranted that the selected fund options would satisfy ERISA’s prudence requirement for fiduciaries. And John Hancock could alter investment option choices.
Participants in the plans were subject to various fees, including an Administrative Maintenance Charge, a Sales and Services fee, and a fee charged by the underlying mutual fund. And the suit was over the allegedly excessive nature of the fees.
The district court concluded that John Hancock was not an ERISA fiduciary. On appeal, the named plaintiffs argued that John Hancock had become a “functional fiduciary” under section 1002(21)(A), by acting “in the capacity of manager, administrator, or financial advisor to a ‘plan.'” The Third Circuit rejected plaintiffs’ broad-based approach to the issue, and defined the question as to whether John Hancock was acting as a fiduciary with respect to the fees it set. In contrast to district court decisions in similar cases from other jurisdictions (Massachusetts and California), the Third Circuit held that John Hancock was merely a service provider and not a fiduciary. It was the plan trustee who had final authority to accept a service provider’s terms (such as its fees).
The issue of when an insurer dons the hat of a fiduciary is one that continues to be hotly debated, and the Third Circuit’s clear delineation of the role of a plan trustee versus that of a company serving to provide fund options will be helpful to defendant insurance companies.