Supreme Court Asked to Review Case About Annuity Contracts in Retirement Plans

The plaintiff in a case alleging Great-West engaged in prohibited transactions has petitioned the U.S. Supreme Court to review the case.

In the case, the plaintiff alleged that Great-West engaged in self-dealing transactions prohibited under Employee Retirement Income Security Act (ERISA) Section 406(b), and caused the plaintiff’s retirement plan to engage in prohibited transactions with a party in interest in violation of ERISA Section 406(a). According to his complaint, Great-West had breached its general duty of loyalty under ERISA Section 404 by setting the credited rate of its Key Guaranteed Portfolio Fund for its own benefit rather than for the plans’ and participants’ benefit; setting the credited rate artificially low and retaining the difference as profit; and charging excessive fees.

The 10th U.S. Circuit Court of Appeals agreed with a District Court ruling that Great-West was not a fiduciary in this matter and that the plaintiff had not adduced sufficient evidence to impose liability on Great-West as a non-fiduciary party in interest.

In his petition to the Supreme Court, the plaintiff says Great-West’s conduct violates ERISA’s clear rules barring parties in interest from using plan assets (i.e., the fund contract) to benefit themselves. He points out that the U.S. Supreme court previously held in Harris Trust & Sav. Bank v. Salomon Smith Barney that where a party in interest violates those rules, plan participants can force them to disgorge their ill-gotten gains. Multiple courts of appeals have held the same.

The plaintiff says the 10th Circuit “flouted that rule, holding that disgorgement was unavailable because the plan asset at issue was the fund contract—not specific property over which petitioner could himself assert title.” So, the question presented to the high court is: May an ERISA plan participant or beneficiary seek disgorgement of unreasonable profits derived from a plan contract from a non-fiduciary party in interest?

According to the petition, the sole question before the lower courts was whether equitable relief was available in the form of disgorgement of Great-West’s unreasonable profits derived from its contracts with ERISA plans. The plaintiff argues that by answering “no,” the courts erroneously distinguished plan contracts from any other type of plan asset, the use of which could support disgorgement. “There is no basis in law or logic for the Tenth Circuit’s new “plan contract” exception. It strays from an on-point decision of this Court, splits from the decisions of other courts of appeals, and frustrates congressional intent,” the petition states.

Again the plaintiff notes that, in Harris Trust, the Supreme Court held that ERISA authorizes disgorgement from non-fiduciaries of profits they derive from wrongfully transferred trust property. The 10th Circuit recognized in its the decision that plan contracts are trust property. But instead of treating these contracts like any other plan asset, as other Circuits have in analogous cases, the 10th Circuit mistakenly believed it could not rely on such contracts to award disgorgement, the plaintiff argues.

“This defied not only judicial precedent, but also legislative intent. There is no reason to believe that Congress wanted to let those who engage in prohibited transactions keep their ill-gotten gains,” the petition says.

The plaintiff also argues that the appellate court’s distinction makes no sense, as most prohibited transactions occur via contract. “Unless profit derived from a contract suffices, there will be hair-splitting and uncertainty in the 10th Circuit over whether the profit was derived from a contract as opposed to some other type of plan asset. That will happen even where, as here, a prohibited transaction involving plan assets clearly took place,” the plaintiff contends. He also says litigants with viable prohibited transaction claims against non-fiduciaries will not know how to frame their requests for relief, and lower courts will not know how to adjudicate them. In addition, he says the remedial scheme that Congress crafted will suffer.

“The question presented thus satisfies the Court’s traditional criteria for plenary review. Review is warranted to restore uniformity to ERISA’s remedial scheme,” the petition states.