Court Deems Principal Not a Fiduciary in Lawsuit Over GICs

The U.S. District Court for the Southern District of Iowa has ruled against plaintiffs in an Employee Retirement Income Security Act (ERISA) lawsuit that named as defendants Principal Life Insurance Company and Principal Financial Group.

At the heart of the complaint were guaranteed investment contracts (GICs), a type of group annuity contract sold to retirement plans. According to the complaint, Principal operates the Principal Fixed Income Guaranteed Option, also known as the Principal Fixed Income Option. Retirement plans in which the certified class are participants and beneficiaries invest in the Fixed Income Option pursuant to a GIC that governs the relationship between the plans and Principal.

The plaintiffs initially argued the contract is inappropriately structured per ERISA’s demands and has enabled Principal to “exercise its discretionary authority to retain unreasonably large and/or excessive profits rather than crediting the participants and beneficiaries of the plans with appropriate returns.”

The complaint suggested participants in plans that invested in the Fixed Income Option are “credited at an interest rate which Principal can set and change in its sole discretion. The rate is applied to all participants in all plans that invest in the Fixed Income Option.” The contract itself, plaintiffs alleged, does not specify the rate, “nor does it promise that the rate will not go below a certain level. Nor does it promise that the rate will remain in effect throughout the life of the contract.”

In the interim period between this decision and the initial filing of the suit, both parties have been busy. The Principal defendants submitted a motion for summary judgment pursuant to Federal Rule of Civil Procedure 56. Principal also filed a motion to exclude opinions and testimony of a key witness for the plaintiffs. Plaintiff Frederick Rozo, individually and on behalf of all others similarly situated, in turn filed a resistance to the motion for summary judgment and a motion to exclude opinions and testimony of a pro-defense witness. After this, Principal filed a reply to Rozo’s resistance and a motion to decertify the class. Rozo then filed an opposition to Principal’s motion to decertify the class, leading Principal to file yet another reply to Rozo’s opposition.

Following detailed examination of the claims and cross-argumentation, the court grants the Principal defendants’ motion for summary judgment on all counts. Accordingly, the lead plaintiff’s motion to exclude opinions and testimony, as well as the defendants’ own such motions and the defendants’ motion to decertify the class are each denied as moot.

Details from the decisions

Facing these allegations, Principal successfully argued it is not a fiduciary for two reasons. First is the fact that Principal announces each new rate in advance, which allows participants time to decide whether to accept or reject the new rate. Because participants decide whether each new rate will apply to their funds, Principal further argued it lacks discretionary authority or control over plan assets sufficient to make it a fiduciary or set its own compensation.

Additionally, Principal argued the Principal Fixed Income Option is a guaranteed benefits policy (GBP) under ERISA, which means that the assets allocated to the option are not plan assets. If so, Principal lacks discretionary authority or control over plan assets sufficient to make it a fiduciary. Finally, Principal argued that, because it lacked the requisite knowledge to show that the transactions in question were unlawful, this fact should preclude the imposition of liability for any prohibited transactions.

After weighing the detailed arguments, the court finds that Principal is not an ERISA fiduciary through its discretion as to the credited rate itself or as to its own compensation, rendering it unnecessary to analyze the parties’ arguments regarding the plan’s status as a GBP. The court explains its conclusions this way: “Here, the undisputed facts show that Principal is not acting as a fiduciary with respect to its ability to set the composite crediting rate. First, Principal is acting pursuant to the Principal Fixed Income Option contract, which is the result of an arms-length bargaining process with the plan sponsors. Until they sign the contract, plan sponsors are free to choose another investment firm or not offer investment services at all. Participants, in turn, choose whether to invest subject to the terms of the contract—they could choose not to invest at all or to retain private investment services separate from those offered by the plan sponsor.”

The court emphasizes how Principal announces the guaranteed interest rate and composite crediting rate in advance and communicates those rates to plan sponsors.

“Plan sponsors are required by law to communicate those rates to participants,” the decision notes. “The overwhelming weight of authority indicates that announcing the rate in advance forestalls fiduciary responsibility under ERISA. Finally, participants have a meaningful opportunity to vote with their feet by leaving the option in response to an objectionable composite crediting rate set by Principal. At the participant level, there are no contractual fees or penalties for transferring funds to a non-competing fund.”

The court is persuaded that the undisputed facts show that Principal does not control its own compensation sufficiently to establish ERISA liability.

“Further, it is self-evident that Principal cannot control its own compensation through retaining the spread because ultimately its compensation is based on how many people invest in the PFIO,” the decision concludes. “In sum, the undisputed facts show that Principal offers a new rate every six months that it hopes will be acceptable to enough participants. It also hopes that it manages its general account funds well enough to make a profit. Principal is no different than any vendor in the market—it decides the terms on which to make its product available, but cannot compel any customer to choose its product or ensure that it will manage its investments well enough to earn a profit. Principal does not control its compensation.”

Non-fiduciary liability?

Even though Principal is not an ERISA fiduciary in this case, the court acknowledges the company may still be liable as a non-fiduciary “party in interest” that is providing services to an ERISA-covered employee benefit plan.

In rejecting this possibility, the court emphasizes that an ERISA plaintiff cannot rely solely on the knowledge that would satisfy a fiduciary’s liability for a prohibited transaction to likewise hold a non-fiduciary party in interest liable for that transaction. Rather, “the plaintiff must show that the defendant knew or should have known that the transaction violated ERISA.”

The full text of the decision, which includes more detail on all of these arguments and conclusions, is available for download here.