‘Ultimate’ Authority: Third Circuit Tosses ‘Excessive Fee’ Suit

By Nevin Adams • October 02, 2014 • 0 Comments

In Santomenno v. John Hancock Life Insurance Company, No. 13–3467, 2014 WL 4783665 (3d Cir. Sept. 26, 2014), the plaintiffs had argued that, as a service provider to their 401(k) plan, John Hancock was a fiduciary, and that it had breached its fiduciary duties by charging excessive fees. However, the court rejected the claims, ruling that the plaintiffs failed to show that John Hancock was a fiduciary — and, perhaps more significantly, that it lacked the “ultimate authority” of making the decision regarding the funds chosen — and fees charged to the plan.

The Facts

In this specific case, John Hancock offered a group annuity contract, which allowed participants to select investment options from a menu of options. It made available an expanded menu (the “Big Menu,” according to the court) of fund choices, including many of its own funds, although the plan sponsor was ultimately responsible for selecting from this larger menu the specific fund(s) for the menu for their plan. John Hancock periodically reviewed the funds on the large menu, and would add/replace funds over time as it deemed appropriate. 

As part of this structure, John Hancock also offered a Fiduciary Standards Warranty (FSW) under which if the sponsor selected at least 19 John Hancock funds, John Hancock warranted that the investment options the plan fiduciary selected to offer participant would satisfy ERISA’s prudence requirements.  

Plaintiffs’ Arguments

The plaintiffs argued that these functions made John Hancock a fiduciary, and thus they should be permitted to move forward with their allegations that the fees John Hancock charged were excessive. The U.S. District Court for the District of New Jersey had originally dismissed the complaint on the grounds that it did not sufficiently allege that John Hancock was an ERISA fiduciary with respect to any misconduct alleged in the complaint. The DOL submitted an amicus brief in support of the plaintiffs’ position, arguing that John Hancock’s ongoing discretion with regard to the funds on the menu, and their ability to substitute and delete funds from its menu (and thus from availability to the plan(s) and participant(s) met the standard.

But the Third Circuit disagreed, noting that the argument was expressly rejected in a trio of Court of Appeals decisions (Renfro v. Unisys Corp., Hecker v. Deere & Co., and Leimkuehler v. American United Life Insurance Co.). “Although John Hancock did have the contractual right to alter the Big Menu or change its fees, it could do so only after giving the trustee adequate notice and sufficient information to decide whether to accept or reject any changes that would be fiduciary decisions,” the Third Circuit noted, going on to say that, “If the trustee rejected the changes, he could “terminate the Contract without penalty….”  and echoing the “choice” sentiments of the Seventh Circuit in noting that, “Thus, ultimate authority still resided with the trustees, who had the choice whether to accept or reject John Hancock’s changes.”

Moreover, the court held that Hancock’s ability to substitute investment options was not relevant to the challenged conduct of charging allegedly excessive fees. “Participants do not allege that John Hancock breached a fiduciary duty by altering an investment option on the Big Menu or by altering their fees. Rather, their claim is that the fees John Hancock charged (which, as we note above, the Plan sponsors were free to accept or reject) were excessive.”

With respect to the argument that John Hancock could change the fees it charged through its own funds, the court found this contention insufficient to confer fiduciary status on John Hancock because it was not sufficiently related to the plaintiffs’ actual fee claims, that those fees were negotiated at “arm’s length,” and that those fees could be changed only after providing notice to the trustees — who retained the ability to terminate the contract without penalty. 

Ultimately, the Third Circuit saw no connection between the wrong alleged (excessive fees) and the actions John Hancock, as plan provider, took in creating, monitoring and maintaining an expanded fund menu from which plan options were chosen — by whom it considered to be the ultimate authority, the plan sponsor.

A helpful analysis from Sidney Alston LLP (which represented the American Council of Life Insurers in its submission of an amicus brief in support of Hancock’s position) is online. Also, the Groom Law Group provides a helpful chart of excessive fee cases.