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Volume XII, Number 335

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Eighth Circuit Holds Principal Did Not Breach Its Fiduciary Duty to 401(k) Plan Participants Despite Conflict of Interest

The U.S. Court of Appeals for the Eighth Circuit recently affirmed a District Court’s finding that Principal Life Insurance Company (“Principal”) did not breach its fiduciary duties regarding its stable value contract for 401(k) plans.  Rozo v. Principal Life Ins. Co., No. 21-2026, 2022 U.S. App. LEXIS 24803 (8th Cir. Sept. 2, 2022).

In Rozo, the plaintiff, on behalf of retirement plan participants who invested in Principal’s Principal Fixed Income Option (“PFIO”), sued under ERISA asserting that Principal breached its fiduciary duty of loyalty by setting low interest rates for participants, and engaged in a prohibited transaction by using the PFIO contract to make money for itself.  The PFIO is an annuity that Principal offers and manages.  In managing the PFIO, Principal sets a guaranteed interest rate, which it calculates by subtracting “deducts” from the return it expects to earn on the assets.  Principal is only compensated for the positive spread between the amount it promises to participants and what its investments actually yield. 

Breach of Fiduciary Duty Claim

To prevail on its breach of fiduciary duty claim, the plaintiff needed to show that the Principal acted as a fiduciary, breached its fiduciary duties, and caused a loss to the plan. To make such a showing, plaintiff asserted that Principal acted at least in part to advance its own interests by increasing profits, thereby breaching its fiduciary duty.  In evaluating this argument, the Eighth Circuit acknowledged that it had yet to set forth factors for determining whether plan administrators acted “solely in participants’ interests” and noted the importance of identifying each of the parties’ interests when making conflict of interest determinations. 

To do that, the court adopted the First Circuit’s analysis in Ellis v. Fid. Mgmt. Tr. Co., 883 F.3d 1, 9 (1st Cir. 2018) and agreed with the District Court that a “tension” existed between the parties’ interests; the higher the deducts, the lower the rate paid to participants, and the higher Principal’s revenue from the PFIO.

Due to the inherent conflict, the court scrutinized Principal’s actions more closely, but nevertheless found the district court did not err in finding (1) Principal set the deducts in the participant’s interest and (2) the “deducts were reasonable and set by Principal in the participant’s interest of paying a reasonable amount for the PFIO’s administration.”  In reaching these conclusions, the court highlighted that tension does not inevitably result in the type of conflict of interest that establishes a breach of the duty of loyalty and “ERISA does not create an exclusive duty to maximize pecuniary interests.”

Prohibited-Transaction Claim

The court likewise affirmed the dismissal of the prohibited transaction claim because Principal proved that its compensation was reasonable, and therefore it is exempted from liability.

Takeaways

This decision solidifies that companies like Principal, who offer fixed-income investment products, can create fiduciary responsibilities when they deduct from investment returns and set participant rates. Accordingly, companies who offer such investment products must analyze the appropriate factors to ensure compensation is reasonable and the fund is not operated with a profit objective for the company. 

Jackson Lewis P.C. © 2022National Law Review, Volume XII, Number 276
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About this Author

René E. Thorne, Jackson Lewis, Employment Litigation, ERISA Attorney"
Office Managing Principal and Office Litigation Manager

René E. Thorne is Office Managing Principal of the New Orleans, Louisiana, office of Jackson Lewis P.C. Her practice covers the full range of employee benefit litigation matters, including representation of employers, plans, plan fiduciaries, and trustees.

In that regard, she has handled numerous ERISA class actions for clients such as Nortel Networks, Target, Krispy Kreme Doughnuts, Owens Healthcare, United Airlines ESOP Committee, Dunbar Armored, United Companies, Benefits Administration Corporation, and Beverly Enterprises. Ms. Thorne also has handled...

504-208-1755
Darran E. St. Ange Labor & Employment Attorney Jackson Lewis Berkeley Heights, NJ
Associate

Darran E. St. Ange is an Associate in the Berkeley Heights, New Jersey, office of Jackson Lewis P.C. His practice focuses on representing employers in workplace law matters, including preventive advice and counseling.

908-795-5200
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