Excessive Fee Claims Against Principal Dismissed

An appellate court has dismissed a plan sponsor’s lawsuit claiming its plan provider charged excessive fees to retirement plan participants.

Affirming a district court’s decision that McCaffree Financial Corp. failed to state a claim, the 8th U.S. Circuit Court of Appeals agreed that Principal Financial Group was not acting as a fiduciary under the Employee Retirement Income Security Act (ERISA) when it entered into a contract with McCaffree to offer separately managed accounts for McCaffree’s retirement plan for employees.

The contract between McCaffree and Principal provided that plan participants could choose to invest their accounts among various separate accounts which invested in Principal mutual funds. Principal reserved the right to limit which separate amounts it made available to participants and McCaffree also had the ability to limit in which accounts employees could invest. Principal presented 63 accounts that could be included in the contract, and this was narrowed down to 29 accounts made available to plan participants.

The contract also provided that participants would pay both management fees and operating expenses to Principal. Principal assessed the management fees as a percentage of the assets invested in a separate account, and this percentage varied for each account according to its associated mutual fund. In addition, Principal could unilaterally adjust the management fee for any account, subject to a cap specified in the contract, and would have to provide participants with at least 30 days’ written notice of such change.

McCaffree entered into the contract in 2009. In 2014, it filed a lawsuit alleging that Principal charged participants invested in these separately managed accounts “grossly excessive management fees and other fees” in violation of its fiduciary duties under ERISA.

The appellate court said that to first state a claim of breach of fiduciary duty, a plaintiff must first plead facts demonstrating the defendant is a fiduciary. Principal was not a named fiduciary to the plan.

McCaffree argued that Principal’s selection of 63 separate accounts in the initial investment menu constituted both an exercise of discretionary authority over plan management and over plan administration, so it owed a fiduciary duty to make sure fees for the accounts were reasonable. However, the appellate court noted that the contract clearly identified each account’s management fee and authorized Principal to pass through expenses to participants. The court said sister circuits have held that a service provider’s adherence to its agreement with a plan sponsor does not implicate any fiduciary duty where the parties negotiated and agreed to the terms of the agreement in an arm’s-length bargaining process. Up until it signed the agreement with Principal, McCaffree remained free to reject its terms and contract with another service provider.                        

McCaffree argued that Principal acted as a fiduciary when it selected from the 63 accounts identified, the 29 accounts made available to plan participants. The company contends this winnowing process, after the parties entered into the contract, gave rise to a fiduciary duty to ensure the fees associated with the accounts were reasonable. The court found that McCaffree did not assert that only some of the 63 accounts had excessive fees or that during the winnowing process, Principal made sure participants only had access to the higher-fee accounts. The action subject to complaint is that excessive fees were charged for all the accounts in the contract, so McCaffree cannot base its excessive fee claims on any fiduciary duty Principal may have owed while selecting the 29 accounts, the court concluded.

The appellate court also rejected McCaffree’s argument that Principal’s discretion to increase fees and adjust amounts charged to participants supports its claim that Principal was a fiduciary. Again, the court said the company failed to plead any connection between this and its excessive fee allegations. McCaffree did not allege that Principal exercised this authority, resulting in excessive fees.

Similarly, the court found McCaffree’s allegation that Principal was a fiduciary because it provided participants with “investment advice” was unrelated to the context of the lawsuit. McCaffree also argued Principal inadequately disclosed the additional layer of management fee for the underlying Principal mutual funds in which the separate accounts were invested, but the court found the mutual fund fees were not subject to complaint, so this argument does not apply to the decision whether Principal was a fiduciary for actions relating to the complaint.