The Fiduciary Corner: Rollovers to Plan Service Providers Present
Fiduciary Concerns
By Gregory L. Ash
Spencer Fane Britt & Browne LLP, Overland Park, Kansas
Plan sponsors and retirement plan service providers each have
reason to be concerned about a recent decision in an ERISA lawsuit
pending before a federal court in Iowa. That decision allowed former
participants in two separate 401(k) plans to proceed with their claims
that the Principal Financial Group, the third-party service provider
for each plan, breached its fiduciary duties by encouraging retired
participants to roll their plan accounts into high-cost IRA products
affiliated with Principal. (Young v. Principal Financial Group,
Inc.) Although the court rejected one of the participants'
theories of relief on the grounds that they did not have standing to
pursue it, a second theory survived.
The former participants allege that they received unsolicited
letters from Principal representatives shortly after they retired.
Those letters encouraged the retirees to contact “benefits
counselors” at Principal who would advise them about their
retirement plan distribution options. The participants claim, however,
that these counselors were only “minimally trained salespersons
working in a boiler-room sales operation” who pushed them into
inappropriate IRA investments affiliated with Principal. According to
the former participants, they would have been better off financially
had they left their accounts invested through their plans.
These retirees sued two Principal affiliates, arguing that those
affiliates and their rollover representatives acted as ERISA
fiduciaries with respect to the plans. Interpreting the U.S. Supreme
Court's recent holding in LaRue v. DeWolff, Boberg &
Associates, the Iowa court first concluded that the retirees could
not pursue a claim against Principal under Section 502(a)(2) of ERISA
- which authorizes relief for losses to plan accounts - because the
losses at issue occurred after the retirees had received
distributions from their plans. Those losses, which allegedly were
attributable to the high fees and poor performance of the Principal
Group's IRA products, were not plan losses, and thus could not
be redressed under this section of ERISA.
Nevertheless, the court allowed the retirees to proceed with a
claim under Section 502(a)(3) of ERISA - which authorizes lawsuits for
individualized equitable relief to redress violations of ERISA.
Although the decision did not spell out the provision of ERISA that
Principal allegedly violated, the retirees certainly could argue that
Principal's rollover consultants were not acting for the exclusive
benefit of plan participants, and that they engaged in prohibited
transactions by encouraging rollovers that would enrich Principal. The
court noted that, if they ultimately are successful in their suit, the
retirees could force Principal to disgorge any profits it generated
from the rollovers, and perhaps to “undo” the rollovers
themselves.
This case is still in its infancy, and the retirees have much to
prove before they succeed. Nonetheless, third-party service providers
will want to monitor it carefully. Plan sponsors should be concerned,
as well. Although this particular suit was filed only against the
plans' service provider (which allegedly acted as a fiduciary), other
fiduciaries - perhaps including a plan sponsor - may be held liable
under ERISA for a co-fiduciary's breach if they knowingly participate
in it or do nothing to correct it. Thus, if sponsors are aware of
questionable rollover practices used by their service providers, they,
too, could be at risk. Such practices might include high-pressure
rollover advice, or even rollover request forms that only identify IRA
options that are affiliated with the service provider.
For more information, in the Tax Management Portfolios, see
Stairman, Bianchi, and Marathas, 374 T.M., ERISA--Litigation,
Procedure, Preemption and Other Title I Issues, and in Tax Practice
Series, see ¶5530, Fiduciary Duties and Prohibited
Transactions.
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