Common sense often makes good law—William O. Douglas
The Employee Retirement Income Security Act of 1974 (“ERISA”) imposes fiduciary duties on certain parties that deal with retirement and health care plans. In a recent class action, Santomenno v. Transamerica Life Ins. Co., 883 F.3d 833 (9th Cir. 2018), the Ninth Circuit reversed a district court order ruling that a third-party plan administrator was an ERISA fiduciary, and vacated another order certifying three separate “breach of fiduciary duty” classes. In doing so, the Ninth Circuit provided important clarification and guidance regarding a third-party administrator’s status as a fiduciary when negotiating and then collecting contractually-specified fees from plan revenue. In short, the Ninth Circuit emphasized that a third-party plan administrator deals at arm’s length with an employer when negotiating compensatory fees, and the resulting services and annuity contracts should be enforced as written.
The plaintiffs were members of 401(k) plans governed by ERISA. The defendant, Transamerica, was the third-party administrator of those plans. As typically happens, the plaintiffs’ employers entered into contracts with Transamerica to operate the plans. In connection with that contracting process, the employers selected a list of potential investment options, which were then offered to their employees. Several of the plans were advised and managed by Transamerica affiliates. Transamerica structured each selected investment option (typically a mutual fund) as a separate account. The contributions of all plan members choosing any individual mutual fund or other option were pooled in the separate account, leading to substantial savings in administrative expenses. The agreements required Transamerica to track the investments of individual employees, among other administrative tasks.
Transamerica’s compensation was established by its contracts with the employers as a fixed percentage of the assets in each separate account, disclosed in a specific schedule of fees for each separate account. Transamerica then collected its fees every day by withdrawing them from the separate accounts. The managers of the investment vehicles also charged fees (these managers included affiliates of Transamerica), and Transamerica received fees from these managers. Transamerica fully disclosed all of these arrangements in advance.
The class action complaint alleged that Transamerica violated ERISA by (1) charging fees...
