A federal district court judge has granted summary judgment to Great-West Life & Annuity Insurance Company in a lawsuit that alleges it breached its fiduciary duty of loyalty under the Employee Retirement Income Security Act (ERISA) Sections 502(a)(2) and (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 the Great-West Key Guaranteed Portfolio Fund.
The investment relationship between Great-West and the plan is governed by a group annuity contract which, among other provisions, provides for a participant’s investment to accrue interest at a rate set prior to each quarter and 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, and Great-West retains the investment returns of the general account above the crediting rate applied to the fund in the plan. Notable to the court’s decision is that the contract also allows plan participants to move money out of the fund at any time without any fees or charges.
U.S. District Judge William J. Martinez of the U.S. District Court for the District of Colorado notes in his opinion that at the center of plaintiff’s claims one and two is the allegation that Great-West failed to comply with ERISA’s requirements for fiduciaries of plan assets, so it must first be determined whether Great-West is a fiduciary.
Great-West’s primary summary judgment argument is that it is not a fiduciary with respect to the fund because ERISA contains an exemption for a “guaranteed benefit policy” (GBP), meaning “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.” According to the opinion, the GBP exemption itself 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.”
Upon analysis, Martinez found Great-West is correct that the fund is a GBP; however, it vastly overstates the scope of the GBP exemption. Thus, the fund’s status as a GBP turns out to be irrelevant.
Martinez said the plaintiff claims, correctly, that regardless of the GBP exception, the contract is still part of the plan and Great-West may have fiduciary responsibilities when it makes discretionary decisions regarding the contract, such as setting the credited rate. However, Great-West argues that the decision to set the credited rate is not an instance of “discretionary authority,” “discretionary control,” or “discretionary responsibility” that would trigger ERISA fiduciary status because it does not have “the ‘final say’” on whether the credited rate will actually apply given that participants can withdraw their money from the fund at any time without fees or charges.
Martinez found that Great-West presented a number of other cases “favoring the theory that a pre-announced rate of return prevents fiduciary status from attaching to the decision regarding what rate to set, at least when the plan and/or its participants can ‘vote with their feet’ if they dislike the new rate.”
While the plaintiff argued none of those cases specifically discuss individual plan participants’ ability to reject the insurance company’s decision, but focused on the plan sponsor’s ability to reject the decision, Martinez did not perceive a meaningful distinction. “ERISA does not impose obligations on retirement plans purely for those plans’ sake, but because Congress was concerned with plan participants’ welfare. Plan participants’ ‘veto’ authority is therefore as relevant as plan sponsors’ authority,” he wrote.
In addition, Martinez agreed with Great-West that it is not an ERISA fiduciary as to its own compensation because it does not control what its plan-related compensation will be. “To be sure, by determining what Credited Rates to offer, [Defendant] can influence its possible margins if plans and their participants invest in the Fund at those guaranteed rates. But its compensation (if any) depends on participants investing their accounts at those Credited Rates, and—because the Credited Rates are stated in advance and participants are free to withdraw their investments at any time without penalty—participants can reject a Credited Rate before it ever applies,” the opinion says.
Martinez granted summary judgment to Great-West on counts one and two.
The plaintiff’s third claim alleges that Great-West can still be liable as a party-in-interest for essentially all the relief he seeks under claims one and two. The opinion notes that ERISA establishes that “[a] fiduciary with respect to a plan shall not cause the plan to engage in a transaction, if he knows or should know that such transaction constitutes a direct or indirect … use by or for the benefit of a party in interest of any assets of the plan.”
The opinion also notes that the Supreme Court held in Harris Trust & Savings Bank v. Salomon Smith Barney, Inc. that the party-in-interest on the receiving end of such a transaction may be liable under ERISA if it “had actual or constructive knowledge of the circumstances that rendered the transaction unlawful.”
Great-West argues that the plaintiff has not made out a claim for nonfiduciary liability under the standard established in Salomon. Proving it “had actual or constructive knowledge of the circumstances that rendered the transaction unlawful” requires “a showing that the plan fiduciary, with actual or constructive knowledge of the facts satisfying the elements of a [prohibited] transaction, caused the plan to engage in the transaction.” Martinez agreed with Great-West, citing the plaintiff’s “failure to distinguish these two elements of a non-fiduciary liability claim.”Martinez said, “Accordingly, an ERISA plaintiff cannot rely solely on the knowledge that would satisfy a fiduciary’s liability for a prohibited transaction to likewise hold a non-fiduciary party in interest liable for that transaction. Rather, the plaintiff must show that the defendant knew or should have known that the transaction violated ERISA. Plaintiff has not attempted to make this showing, but has instead continually asserted only that the undisputed facts show Defendant had the basic knowledge necessary to make a fiduciary liable.” He granted summary judgment to Great-West on count three.