DOL Challenges Court Decision in Excessive Fee Case

January 28, 2014 (PLANSPONSOR.com) – Secretary of Labor, Thomas E. Perez, has filed a federal court brief disputing a district court’s dismissal of John Hancock’s liability in an excessive fee case.

Perez says in an amicus curiae brief in the 3rd U.S. Circuit Court of Appeals regarding the case Santomenno v. John Hancock that a district court in New Jersey was wrong to find John Hancock was not a fiduciary under the Employee Retirement Income Security Act (ERISA) for the purpose of any of the claims asserted in the case. The brief notes Section 3(21)(A) of ERISA defines “fiduciary” broadly to confer fiduciary status with respect to a plan on any person to the extent that “(i)he exercises any discretionary authority or discretionary control respecting management of such plan or exercises any authority or control respecting management or disposition of its assets, … or (iii) he has any discretionary authority or discretionary responsibility in the administration of such plan.”

The brief points out that plaintiffs’ allegations that John Hancock exercised “discretionary authority or discretionary control” over plan management within the meaning of the first clause of 29 U.S.C. § 1002(21)(A)(i) satisfy the threshold question in every fiduciary breach case, which is whether the defendant was acting as a fiduciary with respect to the challenged conduct.

The case alleged John Hancock regularly monitored the retirement plans and had the authority to unilaterally delete and substitute any or all funds through the Underlying Fund Replacement Regimen and the FundCheck Fund Review and Scorecard program. Perez argues because John Hancock could exercise this power without permission from the plans, the plan trustees did not ultimately have control over whether the options they selected from John Hancock’s larger menu remained in the plans and whether those options would be replaced with other funds. John Hancock also had the discretion to change the share classes in which the plan participants’ retirement savings were invested.

According to the brief, the 3rd Circuit previously found that an entity exercised discretionary authority and control in managing a plan when it notified employee participants of changes that were not set out in the terms of the plan itself in the case Genter v. ACME Scale & Supply Co.

In its decision, the U.S. District Court for the District of New Jersey cited the decision in Renfro v. Unisys (see “John Hancock Cleared of Wrongdoing in Excessive Fee Case”), which made clear that a service provider “owes no fiduciary duty with respect to the negotiation of its fee compensation.” However, Perez notes that district court can follow precedent in cases that involve "nearly identical facts," but argues Renfro is factually distinguishable from the John Hancock case. In Renfro, Fidelity was a plan service provider whose limited role did not involve "the selection and maintenance of the mix and range of investment options included in the plan." Fidelity only had control over the investments that were to be administered by Fidelity, and the employer, Unisys, was free to add non-Fidelity funds to its plan and administer those investments itself.

The John Hancock case differs, Perez argues, because John Hancock retains the discretion to substitute and delete funds from its menu, and thereby from the plans' and participants' menus, without approval from the employers or participants. “John Hancock's discretion over ongoing fund selection–giving it, not the employer, the 'final say' over plan investment options–is much greater than Fidelity's was in Renfro. Thus, this Court's conclusion in Renfro that Fidelity was not acting as a fiduciary in the circumstances of that case does not warrant a similar conclusion under the facts alleged here,” the Secretary’s brief says.

The plaintiffs in the case alleged John Hancock charged excessive fees, improperly received revenue sharing payments and improperly selected the JHT-Money Market Trust as an investment option. In a previous decision, the district court dismissed the claims because it said only those maintaining an ownership interest in the funds in question could sue under the derivative suit provision enacted by Congress, and the plaintiffs did not enjoinder the plan trustees as parties to the case, but the 3rd Circuit reversed that decision (see “Court Moves Forward Excessive Fee Claims Against John Hancock”), sending it back to the district court. The district court’s second dismissal of the claims is on appeal.

The Secretary of Labor’s brief is here.

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