The U.S. District Court for the District of Colorado handed Great-West Annuity and Life Insurance Company a small victory by dismissing part of a class action suit filed by a retirement plan participant invested in one of the firm’s annuity products—but key segments of the challenge were permitted to proceed.
The complaint underlying the case alleges Great-West breached its fiduciary duty of loyalty under Employee Retirement Income Security Act (ERISA) Sections 502(a)(2)-(3)—namely by setting predetermined interest rates artificially low and charging excessive fees in order to increase its own profits from the sale and servicing of certain group annuity contracts. Plaintiffs also allege Great-West engaged in self-dealing transactions prohibited under ERISA § 406(b); and caused the plaintiff’s retirement plan to engage in prohibited transactions with a party in interest in violation of ERISA § 406(a).
At question in the case is the Great-West Key Guaranteed Portfolio Fund, as offered to the Farmers’ Rice Cooperative 401(k) Savings Plan. The lead plaintiff in the case is John Teets, a participant in the Rice Cooperative 401(k) plan who elected to invest his plan contributions in the fund. The investment relationship between Great-West and the plan is governed by a group annuity contract entered into on March 4, 2008. Among other provisions, the contract provides for a participant’s investment to accrue interest at a rate set prior to each quarter. According to Teets, the interest rate here is “determined unilaterally by Defendant, without any specified methodology … However, pursuant to the contract, the effective annual interest rate is guaranteed never to be less than 0%.” Money invested in the fund is not kept in a segregated account, but rather is deposited into defendant’s general account.
In filing a motion to dismiss, Great-West raised two arguments that plaintiff’s claims should be dismissed: first that the Guaranteed Portfolio Fund falls under the guaranteed benefit policy (GBP) exemption in ERISA, and thus Great-West would not be an ERISA fiduciary that could have breached any fiduciary duties; and second, Great-West says the plaintiff’s claims fail because it cannot be both a fiduciary and a party in interest under ERISA § 406(a).
Considering the first argument, the court notes the term “’guaranteed benefit policy’ means an insurance policy or contract to the extent that such policy or contract provides for benefits the amount of which is guaranteed by the insurer,” vis a vis 29 U.S.C. § 1101(b)(2)(B). The GBP exemption reads as follows: “In the case of a plan to which a guaranteed benefit policy is issued by an insurer, the assets of such plan shall be deemed to include such policy, but shall not, solely by reason of the issuance of such policy, be deemed to include any assets of such insurer.”
Thus, according to the district court, “the GBP exemption is not a complete exemption from application of ERISA; rather, when a plan participant invests in a GBP, the policy or contract itself is an asset of the plan, but the invested money that is subject to the policy or contract becomes an asset of the insurer rather than an asset of the plan. Since GBPs contractually provide guaranteed payments to beneficiaries while commingling their investments with the insurer’s general accounts, the exemption allows the insurer to manage its assets—including investments deposited under GBPs—in the insurer’s interest without the potential for conflicting fiduciary duties to manage GBP investments solely for GBP beneficiaries.”
The court had to determine whether the GBP exclusion “applies to the Fund at issue here, and consequently, to what extent Defendant is a fiduciary of Plan assets.” Great-West argued that the fund is a GBP because the risk that the underlying investments will lose value is borne by Great-West, not by participants such as Teets, because Great-West has already guaranteed a payout of at least 0% each quarter. According to Great-West, this pre-set interest rate constitutes a genuine guarantee of payable benefits to participants. Great-West supports its interpretation of the GBP exemption by citing a Department of Labor information letter which applied the ruling of a 1993 U.S. Supreme Court decision (John Hancock Mutual Life Insurance Co. vs. Harris Trust & Savings Bank) to a particular group annuity contract, concluding that it appeared to constitute a GBP.
However, as Great-West admits, such opinion letters do not carry the force of law, and are generally case-specific.
“Thus, the Court must still apply Harris Trust to the Contract at issue here," the court said. "As a threshold matter, the fact that the Fund’s assets are placed in Defendant’s general account is not dispositive. Recognizing that the potential for conflicts in the management of general account assets and plan assets was the policy reason for the GBP exemption, the Supreme Court nevertheless held that such potential conflicts do not automatically preclude fiduciary duties from applying to plan assets under ERISA.”
Arguing that the GBP exemption does not relieve Great-West of fiduciary duties under ERISA, Teets contends that the annuity contract’s provision permitting Great-West to set an interest rate of 0% “means that participants bear a risk and benefits are not truly guaranteed.”
Teets further contends that, even if the GBP exemption does apply, the annuity contract is still a plan asset, and Great-West’s acts in setting the interest rate “amount to the discretionary administration of the contract, and thus are acts to which a fiduciary duty applies.” In support of the first of these arguments, Harris Trust suggests that courts should consider “the insurer’s guarantee of a reasonable rate of return,” and that “plan participants are undeniably at risk inasmuch as the future amount of benefits . . . can fall to zero.”
The court notes that the annuity contract underlying the Great-West Key Guaranteed Portfolio Fund “bears many of the indicia of a GBP as defined under Harris Trust: it allocates to the insurer the risk of loss of principal, and guarantees a benefit amount at the beginning of each quarter. Nevertheless, the Court cannot definitively conclude at this stage of the case that the rate of return was ‘reasonable,’ that Defendant’s discretionary authority did not extend to management of Plan assets, or that the Contract’s discretionary rate model did not allocate risk to Plan participants invested in the Fund sufficient to foreclose applicability of fiduciary duties.” The court therefore denied Great-West’s motion to dismiss on this matter
Great-West was a little more successful on the challenge raised under ERISA Section 406(a), but this claim was not entirely laid to rest either.
Teets claimed that Great-West is “a party in interest with respect to the plans,” as well as a fiduciary of the plans, and thus that Great-West engaged in prohibited transactions by selling the annuity contracts to the plans and receiving greater-than-reasonable compensation for the services provided pursuant to the contract. Great-West claimed this challenge should be dismissed because it is predicated on the same party—Great-West—fitting in the roles of both the fiduciary and the party in interest under ERISA Section 406(a).
The legal reasoning is somewhat complicated, but the court concluded that as pled, Teets complaint along these lines was not properly constructed. Accordingly, the court granted Great-West’s motion to dismiss this claim. However, given the arguments presented by Teets, the court found it cannot say definitively that permitting him to amend this claim would be futile at this stage of the proceedings.
Thus, the claim under 406(a) was “dismissed without prejudice. Should Plaintiff seek to amend his Complaint, he may promptly file an appropriate motion.”
The full text of the decision is here.