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Compliance October 25, 2017
Xerox Wins Dismissal of Suit Over Financial Engines Offering
Neither Xerox nor Financial Engines were acting in a fiduciary capacity relating to their fee arrangement, a court found.
Reported by Rebecca Moore
A federal court judge has dismissed a case challenging a fee arrangement between advice provider Financial Engines and recordkeeper Xerox HR Solutions.
Akin to a finding in a similar lawsuit against Fidelity Investments, the judge in the Xerox case found that neither Xerox nor Financial Engines were acting in a fiduciary capacity relating to the fee arrangement.
The plaintiffs, participants in three Ford Motor Company retirement plans, claim that Xerox is a fiduciary because it had discretion over the amount of its compensation. Specifically, they allege that because the agreement between Xerox and Ford did not curtail Xerox’s ability to seek compensation from a party like Financial Engines (FE), Xerox in effect controlled the terms of its own compensation by seeking additional money from FE. Xerox argues that it and FE cannot be fiduciaries with respect to their own compensation because their relationships with each other and with Ford amount to “arm’s length contracts” that “do not give rise to ERISA fiduciary status.” U.S. District Judge Robert H. Cleland of the U.S. District Court for the Eastern District of Michigan disagreed with the plaintiffs that “discretion” includes the ability to seek additional compensation not provided for in the original agreement.
Cleland said any fees that Xerox collected were collected from FE, and were based firstly on an arm’s length negotiation between Xerox and FE—not Xerox’s discretion as it related to the plans. Even after Xerox and FE entered into their agreement, Xerox’s compensation was based on factors outside of its discretion, Cleland noted: namely, the number of participants who used FE’s services and the valuation of the assets of those participants. “Defendant’s receipt of a portion of FE’s fees is entirely dependent on whether the plans’ participants engage FE’s services in the first place. If participants in the plans choose not to use FE’s services, Defendant receives no such fees at all,” the judge wrote in his opinion. “Because Defendant did not have discretion over the amount of its own compensation as it relates to Plaintiffs, Defendant was not acting as a fiduciary in collecting fees from FE.”
The plaintiffs also contend that Xerox is a fiduciary because it selected another fiduciary—FE—and “many courts have held that appointing an ERISA fiduciary is itself a fiduciary act.” However, Xerox argues that it cannot be held liable as a fiduciary for selecting FE for the Ford plans because such a selection amounted to a “product design feature” for which fiduciary liability cannot attach. Cleland agreed with Xerox that the plaintiffs have not adequately alleged that Xerox chose FE for the Ford plans; rather, FE was part of the Xerox HR “product” that Ford ultimately chose.
Finally, the plaintiffs allege that Xerox is an ERISA fiduciary because fiduciary status is “ultimately a matter of functional control over a plan or its assets” and the agreement between Ford and FE amounts to a “plan asset” over which Xerox had “functional control.” But, Xerox contends that it cannot be an Employee Retirement Income Security Act (ERISA) fiduciary with respect to control over the “plan asset” of the Ford-FE agreement because there is no reason to believe that the Ford-FE agreement is an “asset of the plans.” Cleland decided that the plaintiffs cited no authority for the proposition that a contract for services independently negotiated between third parties constitutes an intangible property interest rising to the level of a plan asset. He, therefore, found no reason to conclude that the Ford-FE agreement was an “asset” of the plan.
Plaintiffs allowed to repleadCleland ruled that plaintiffs will be given leave to replead to allege—to the extent that they can—facts demonstrating that Xerox “exercised de facto control” over the election of FE as a fiduciary for the plans.
He said the plaintiffs do allege—albeit through conclusory statements—that Xerox “controlled the negotiation of the terms and conditions under which FE would provide its services to the participants of the Ford Plans.” They also allege that “Xerox HR’s discretionary control over the provision of FE’s services to the plans gives Xerox HR discretionary authority and control over the management of the plans themselves.” Cleland noted that ultimately, in light of the fact that the “definition of a fiduciary under ERISA is a functional one,” it is possible for a party to act as a functional fiduciary to the extent that it controls the terms and conditions under which a fiduciary will act in a fiduciary capacity with respect to another party.
Plaintiffs seem to suggest, in this portion of the complaint, that by “control” over the negotiation of terms and conditions, they mean simply that FE, after contracting with the Ford plans, would still be required to pay Xerox a portion of its fees. They specify that the “terms and conditions” Xerox controlled were “specifically, the terms requiring payment to Xerox HR of a portion of the fees paid by retirement plan investors for participating in the investment advice program.” Cleland said he doubts that such an allegation—an allegation that does not say that Xerox was directly involved in the Ford-FE negotiations—rises to the level of appointment of a fiduciary sufficient to impose fiduciary liability. However, he found the plaintiffs’ complaint is unclear on this point, and “thus does not permit the court to infer more than a ‘mere possibility of misconduct.’”
Cleland also said dismissal on the basis of whether or not the fees in the case were unreasonable would be inappropriate. “Indeed, an indefinite concept like ‘reasonableness’ is precisely the kind of factual inquiry inappropriate for a motion to dismiss. While the fee-sharing arrangement itself, as Defendant notes, is not per se a violation of ERISA, it does not follow that Defendant’s arrangement must have been reasonable,” Cleland wrote. He declined Xerox’s invitation to dismiss on this basis.