401(k) Plan Trustees Sue John Hancock Over Retention of Foreign Tax Credits

A federal court has certified a class of trustees, sponsors and administrators of employee benefit plans that purchased a group variable annuity contract from John Hancock Life Insurance Co. via its Signature platform, which is run by John Hancock’s Retirement Plan Services division.

Last year, trustees of the Romano Law, PL 401k Plan sued John Hancock over tax credits related to investments they chose for their plan under the group contract that “invest in stocks and securities of foreign companies.” The plaintiffs allege John Hancock breached the Employee Retirement Income Security Act (ERISA) fiduciary duty of loyalty by receiving and retaining foreign tax credits (FTCs) for the international investment options, resulting in an alleged reduction in the value of the plan’s assets. The plaintiffs also allege that John Hancock caused the plan to enter into an ERISA-prohibited transaction by not crediting it with the value of the FTCs.

According to the order on the motion for class certification, some of the investments held foreign securities and incurred foreign taxes. The plaintiffs allege that John Hancock did not actually pay the foreign taxes; effectively, they say, the plan did, because the value of the plan participants’ investments fell by the amount of taxes paid.

The plaintiffs say John Hancock received and retained the benefit of the FTCs that the payment of foreign taxes generated and did not disclose the FTC compensation to the plan. They also claim that John Hancock did not use the compensation to offset the fees that it charged, contrary to the terms of its standardized form contracts. The lawsuit alleges that John Hancock’s conduct enriched the insurer by more than $100 million and violated ERISA.

The lawsuit seeks for John Hancock to “make good any losses to the plan resulting from each breach” of ERISA.

The plaintiffs filed a motion to certify the following class: “All trustees of all defined contribution [DC] employee benefit plans covered by the Employee Retirement Income Security Act of 1974 with which [John] Hancock had group annuity contracts and recordkeeping agreements at any time from March 25, 2013, the date of class certification, and that have, since March 25, 2013, allocated assets through [John] Hancock’s Signature Platform to international investment options that have passed through foreign tax credits to [John] Hancock.”

The plaintiffs allege that in profiting from FTCs without disclosing them or passing through a commensurate benefit to plans that generated such credits, John Hancock failed to act solely in the best interest of the plans and failed to defray reasonable expenses of administering the plans.

Magistrate Judge Jonathan Goodman of the U.S. District Court for the Southern District of Florida granted the motion to certify the class. However, he noted in his order that unless the parties reach an agreement, he will hold a hearing on the issue of the specific timeframe to be used to define the class. John Hancock argues that the contract for the Romano Law plan did not become effective until October 17, 2014, and that the plaintiffs cannot represent the proposed class for the period from March 25, 2013, through October 17, 2014.

John Hancock has not yet responded to a request for comment about the lawsuit.