The Department of Labor (DOL) recently filed an amicus brief
in a case on appeal within the 7th Circuit, Leimkuehler v. American United Life
Insurance Co. The case considers whether an insurance company managing separate
account products for Employee Retirement Income Security Act (ERISA)-covered
plans becomes a fiduciary when it retains, but does not use, the authority to
change the mutual funds initially approved by the plan sponsors. The brief
raises significant obstacles to the use of “negative consent” procedures in
implementing fiduciary directions in 401(k) plans.
The case was brought by the trustee of the Leimkuehler Inc.
Profit Sharing Plan, which entered into a group variable annuity contract with
the American United Life Insurance Company (AUL). Under the contract, the
Leimkuehler plan invested in separate accounts maintained by AUL. Each separate
account, in turn, invested in mutual funds. As is typically the case, the plan
sponsor approved the separate account’s initial lineup of mutual funds by approving
a list of funds in which the separate account would invest. The contract
between AUL and the Leimkuehler plan provided that, where required by
applicable law, AUL would not substitute any shares attributable to the plan’s
interest in any investment account without notice or the approval by the plan
In the lower court, AUL argued that it was not a fiduciary
with respect to the selection of mutual funds and revenue sharing payments
received from those funds. The district court agreed and reasoned, under Hecker
v. Deere & Co., that AUL was free to limit the universe of mutual funds and
share classes it would make available to the Leimkuehler plan without assuming
fiduciary status for the plan’s selection of the funds for the investment lineup.
The court concluded that AUL’s initial practice of investing in the same funds
did not make it a fiduciary and it would not become a fiduciary, so long as it
continued to comply with participants’ directions for the allocation of the
investments among the funds AUL made available. The plaintiffs have since
appealed this decision to the 7th Circuit.
The DOL argued in its amicus brief before the 7th Circuit
that AUL was a fiduciary to the Leimkuehler plan when it simply retained
discretion to substitute funds under the contract. Importantly, the DOL said that the
arrangement did not fall within the 1997 Advisory Opinion. The department
further distinguished AUL from the Hecker case by arguing that AUL did not
merely present investment options to an independent fiduciary for independent
approval but rather retained unilateral authority over plan investments and
used that authority to receive undisclosed compensation. In sum, the DOL argued
that by failing to provide specific negative consent procedures in the
contract, AUL became a fiduciary, notwithstanding the disclosures made to the
plan sponsor and the sponsor’s non-objection to the proposed change.