Santomenno Ex Rel. John Hancock Trust v. John Hancock Life Insurance Co. (U.S.A) , 768 F.3d 284 ( 2014 )

PRECEDENTIAL
UNITED STATES COURT OF APPEALS
FOR THE THIRD CIRCUIT
______
No. 13-3467
______
DANIELLE SANTOMENNO, for the use and benefit of the
John Hancock Trust and the John Hancock Funds II; KAREN
POLEY and BARBARA POLEY for the use and benefit of
the John Hancock Funds II; DANIELLE SANTOMENNO,
KAREN POLEY and BARBARA POLEY individually and
on behalf of ERISA employee benefit plans that held, or
continue to hold, group variable annuity contracts issued/sold
by John Hancock Life Insurance Company (U.S.A.), and the
participants and beneficiaries of all such ERISA covered
employee benefit plans; and DANIELLE SANTOMENNO
individually and on behalf of any person or entity that is a
party to, or has acquired rights under, an individual or group
variable annuity contract that was issued/sold by John
Hancock Life Insurance Company (U.S.A.) where the
underlying investment was a John Hancock proprietary fund
contained in the John Hancock Trust
Danielle Santomenno;
Karen Poley;
Barbara Poley,
Appellants
v.
JOHN HANCOCK LIFE INSURANCE COMPANY
(U.S.A); JOHN HANCOCK INVESTMENT
MANAGEMENT SERVICES, LLC;
JOHN HANCOCK FUNDS; LLC,
JOHN HANCOCK DISTRIBUTORS, LLC
______
On Appeal from the United States District Court
for the District of New Jersey
(D.N.J. 2-10-cv-01655)
District Judge: Honorable William J. Martini
______
Argued June 12, 2014
Before: FISHER, VAN ANTWERPEN and TASHIMA,*
Circuit Judges.
(Filed: September 26, 2014 )
Arnold C. Lakind, Esq.
Robert L. Lakind, Esq.
Robert E. Lytle, Esq.
Moshe Maimon, Esq.
Stephen Skillman, Esq. ARGUED
*
The Honorable A. Wallace Tashima, Senior Circuit Judge
for the Ninth Circuit Court of Appeals, sitting by designation.
2
Szaferman, Lakind, Blumstein & Blader
101 Grovers Mill Road
Quakerbridge Executive Center, Suite 200
Lawrenceville, NJ 08648
Counsel for Appellants
Daniel P. Condon, Esq.
Alison V. Douglass, Esq.
James O. Fleckner, Esq. ARGUED
Goodwin Procter
53 State Street
Exchange Place
Boston, MA 02109
Counsel for Appellees
Jonathon B. Lower, Esq.
Brian J. McMahon, Esq.
Gibbons
One Gateway Center
Newark, NJ 07102
Counsel for Appellees
Radha Vishnuvajjala, Esq. ARGUED
United States Department of Labor, Room N-4611
200 Constitution Avenue, N.W.
Washington, DC 20210
Counsel for Amicus Curiae Secretary United States
Department of Labor
3
Eric S. Mattson, Esq.
Sidley Austin
One South Dearborn Street
Chicago, IL 60603
Counsel for Amicus Curiae American Council of Life
Insurers
______
OPINION OF THE COURT
______
FISHER, Circuit Judge.
Plaintiff-Appellants Danielle Santomenno, Karen
Poley, and Barbara Poley (collectively, “Participants”)
invested money in 401(k) benefit plans. They brought suit on
behalf of themselves and a putative class of benefit plans and
plan participants that have held or continue to hold group
annuity contracts with Defendant-Appellees John Hancock
Life Insurance Company (U.S.A.), John Hancock Investment
Management Services, LLC, John Hancock Funds, LLC, and
John Hancock Distributors, LLC (collectively, “John
Hancock”). They allege that John Hancock charged
excessive fees for its services in breach of its fiduciary duty
under the Employee Retirement Income Security Act of 1974
(“ERISA”), 29 U.S.C. § 1001 et seq. The District Court
granted John Hancock’s motion to dismiss, ruling that John
Hancock was not a fiduciary with respect to the alleged
breaches. We will affirm.
4
I.
A.
Participants were enrolled in the J&H Berge, Inc.
401(k) Profit Sharing Plan (the “Berge Plan”) and the Scibal
Associates, Inc. 401(k) Plan (the “Scibal Plan,” and together
with the Berge Plan, the “Plans”). 401(k) plans are a type of
“defined contribution” plan governed by ERISA. Each of the
Plans had a trustee, and the trustees contracted with John
Hancock to provide a product known as a group variable
annuity contract. As part of this product, John Hancock
assembled for the Plans a variety of investment options into
which Participants could direct their contributions. This
collection of investment options was referred to as the “Big
Menu,” and was composed primarily of John Hancock mutual
funds, such as the John Hancock Trust-Money Market Trust
(“Money Market Trust”), but also included independent funds
offered by other companies.
From the Big Menu created by John Hancock the
trustees selected which investment options to offer to their
Plan participants, known as the “Small Menu.” Participants
could then select from the options on the Small Menu where
to invest their 401(k) contributions. Rather than investing
each Participant’s contributions directly into an investment
option (for example, a mutual fund), John Hancock directed
plan participants’ contributions into separate sub-accounts,
each of which was correlated with an underlying investment
option. John Hancock would pool the contributions in the
sub-accounts, and then invest them in the corresponding
investment option. Plan trustees could select for their Small
Menus any option off the Big Menu, as well as investments
offered by companies other than John Hancock. See JA at
219, Berge Contract § 1 (defining “Competing Investment
5
Option” as a fund “available under the Plan, either in the
Contract or elsewhere”).
As part of its agreement with the Plans, John Hancock
offered a product feature called the Fiduciary Standards
Warranty (“FSW”). Plan trustees received this feature if they
selected for their Small Menus at least nineteen funds offered
by John Hancock, rather than independent funds. Under the
FSW, John Hancock “warrants and covenants that the
investment options Plan fiduciaries select to offer to Plan
participants: Will satisfy the prudence requirement of . . .
ERISA.” JA at 59, Second Amended Complaint
(“Complaint” or “SAC”) ¶ 170. If a trustee constructed its
Small Menu in accordance with the FSW, John Hancock
agreed that it would reimburse the plan for any losses arising
out of litigation challenging the prudence of the plan’s
investment selections, including litigation costs. In the FSW,
John Hancock stated that it was “not a fiduciary,” and that the
FSW “does not guarantee that any particular Investment
option is suited to the needs of any individual plan participant
and, thus, does not cover any claims by any Individual
participant based on the needs of, or suitability for, such
participant.” JA at 414. John Hancock also offered a service
called the “Fund Check Fund Review and Scorecard.”
Through this program, John Hancock monitored the
performance of all investment options on the Big Menu,
distributed copies of its evaluations to plan trustees, and
informed them as to changes in the Big Menu made in
response to these evaluations.
When Participants invested in a particular sub-account,
they were subject to three fees: an Administrative
Maintenance Charge (“AMC”); a Sales & Service (“S&S”)
fee; and the fee charged by the underlying mutual fund,
known as a 12b-1 fee after the provision in the securities
6
regulations that authorizes their payment out of plan assets.
See 17 C.F.R. § 270.12b-1. The sum of these fees is referred
to as the “expense ratio” for each sub-account.
John Hancock retained the authority to add, delete, or
substitute the investment options it offered on the Big Menu.
Under what it referred to as its “Underlying Fund
Replacement Regimen,” John Hancock reviewed investment
options “on a daily, monthly, quarterly, and annual basis” and
replaced them “[i]f it . . . determined that the investment
option is no longer able to deliver its value proposition to
[John Hancock’s] clients and there is a viable replacement
option.” JA at 63, SAC ¶¶ 189-90. For example, in 2009,
John Hancock removed the “John Hancock Classic Value
Fund” and replaced it with the “T. Rowe Price Equity Income
Fund.” JA at 57, SAC ¶ 158. John Hancock also retained the
authority to change the share class for each fund into which
the Participants’ contributions were invested. The expense
ratio of a fund will depend, in part, on the share class in
which it invests. Notwithstanding John Hancock’s authority
over the construction of the Big Menu and its selection of
share classes, the trustees retained the responsibility for
selecting investment options for inclusion in the Small Menu
and for offering to Participants.
B.
Participants filed this suit on March 31, 2010, and filed
a second amended complaint on October 22, 2010. Counts I
through VII were brought under ERISA. Counts VIII and IX
were brought under two provisions of the Investment
Company Act of 1940 (“ICA”), 15 U.S.C. § 80a-1 et seq.
John Hancock moved to dismiss pursuant to Federal Rule of
Civil Procedure 12(b)(6), which the District Court granted in
its entirety. With respect to the ERISA claims, the District
7
Court concluded that dismissal was proper because
Participants did not make a pre-lawsuit demand and did not
join the plan trustees in the suit. Participants appealed, and
we affirmed dismissal of the ICA claims, but vacated the
portion of the District Court’s order dismissing the ERISA
claims and remanded for further proceedings. Santomenno v.
John Hancock Life Ins. Co. (U.S.A.), 677 F.3d 178 (3d Cir.
2012). We concluded that the District Court’s reliance on the
common law of trusts to engraft pre-suit demand and
mandatory joinder requirements was inconsistent with
ERISA’s intent. Id. at 189.
On remand, John Hancock renewed its motion to
dismiss, raising a variety of arguments. Some of John
Hancock’s arguments were raised in its first motion to
dismiss and some were not, and Participants asserted that
John Hancock was barred from raising new arguments in its
renewed motion. John Hancock’s lack of fiduciary status,
however, had been raised in the first motion, and the District
Court decided the case solely on that basis. See Santomenno
v. John Hancock Life Ins. Co. (U.S.A.), No. 10-1655, 2013
WL 3864395, at *4 n.2 (D.N.J. July 24, 2013). The District
Court granted the motion to dismiss, concluding that John
Hancock was not an ERISA fiduciary with respect to any of
the misconduct alleged in the complaint. Participants timely
appealed. The Secretary of Labor filed an amicus brief in
support of Participants urging reversal, and the American
Council of Life Insurers (“ACLI”), filed an amicus brief in
support of John Hancock urging affirmance.
II.
The District Court had jurisdiction pursuant to 28
U.S.C. § 1331 and 29 U.S.C. § 1132(e). We have appellate
jurisdiction over the District Court’s final order of dismissal
8
pursuant to 28 U.S.C. § 1291, and our review of that order is
plenary. Fowler v. UPMC Shadyside, 578 F.3d 203, 206 (3d
Cir. 2009).
In reviewing a motion to dismiss under Rule 12(b)(6),
we treat as true all well-pleaded facts in the complaint, which
we construe in the “‘light most favorable to the plaintiff.’”
Warren Gen. Hosp. v. Amgen Inc., 643 F.3d 77, 84 (3d Cir.
2011) (quoting Pinker v. Roche Holdings Ltd., 292 F.3d 361,
374 n.7 (3d Cir. 2002)). To survive a motion to dismiss, “a
claimant must state a ‘plausible’ claim for relief, and ‘[a]
claim has facial plausibility when the pleaded factual content
allows the court to draw the reasonable inference that the
defendant is liable for the misconduct alleged.’” Thompson v.
Real Estate Mortg. Network, 748 F.3d 142, 147 (3d Cir.
2014) (alteration in original) (quoting Ashcroft v. Iqbal, 556
U.S. 662, 678 (2009)). Whether the facts alleged in the
complaint adequately plead fiduciary status is a question we
review de novo. Srein v. Frankford Trust Co., 323 F.3d 214,
220 (3d Cir. 2003).
Generally, a court considering a motion to dismiss
under Rule 12(b)(6) may consider only the allegations
contained in the pleading to determine its sufficiency. Pryor
v. Nat’l Collegiate Athletic Ass’n, 288 F.3d 548, 560 (3d Cir.
2002). “However, the court may consider documents which
are attached to or submitted with the complaint, as well as . . .
. documents whose contents are alleged in the complaint and
whose authenticity no party questions, but which are not
physically attached to the pleading. . . .” Id. (emphasis
omitted) (quoting 62 Fed. Proc., L.Ed. § 62:508). Similarly,
“[d]ocuments that the defendant attaches to the motion to
dismiss are considered part of the pleadings if they are
referred to in the plaintiff’s complaint and are central to the
claim.” Id. (emphasis omitted) (quoting 62 Fed. Proc., L.Ed.
9
§ 62:508). Accordingly, we may consider the Plan contracts
and supporting documents in our disposition of this appeal.
III.
A.
ERISA is a “‘comprehensive’” statute that is “the
product of a decade of congressional study of the Nation’s
private employee benefit system.” Mertens v. Hewitt Assocs.,
508 U.S. 248, 251 (1993) (quoting Nachman Corp. v. Pension
Benefit Guar. Corp., 446 U.S. 359, 361 (1980)). Participants
are enrolled in ERISA-regulated 401(k) plans. See LaRue v.
DeWolff, Boberg & Assoc., Inc., 552 U.S. 248, 255 (2008)
(recognizing that “[d]efined contribution plans” – which
include 401(k) plans – “dominate the retirement plan scene
today”). ERISA imposes fiduciary responsibilities on certain
persons. ERISA fiduciaries must act solely in the interest of
the plan participants and beneficiaries and must act to
“defray[] reasonable expenses of administering the plan.” 29
U.S.C. § 1104(a)(1)(A)(ii). Participants assert breaches of
fiduciary duties and prohibited transactions under 29 U.S.C.
§§ 1104(a), 1106(a)-(b).
ERISA provides that a person is a fiduciary to a plan if
the plan identifies them as such. See 29 U.S.C. § 1102(a). It
also provides that:
[A] person is a fiduciary with
respect to a plan to the extent
(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,
10
(ii) he renders investment advice
for a fee or other compensation,
direct or indirect, with respect to
any moneys or other property of
such plan, or has any authority or
responsibility to do so, or
(iii) he has any discretionary
authority or discretionary
responsibility in the
administration of such plan. Such
term includes any person
designated under section
1105(c)(1)(B) of this title.
29 U.S.C. § 1002(21)(A).
To be a fiduciary within the meaning of §
1002(21)(A), a person must “act[] in the capacity of manager,
administrator, or financial advisor to a ‘plan.’” Pegram v.
Herdrich, 530 U.S. 211, 222 (2000). This so-called
“functional” fiduciary duty is contextual – it arises “only to
the extent” a person acts in an administrative, managerial, or
advisory capacity to an employee benefits plan. Id. at 225-26
(internal quotation marks omitted). “Because an entity is
only a fiduciary to the extent it possesses authority or
discretionary control over the plan, we ‘must ask whether [the
entity] is a fiduciary with respect to the particular activity in
question.’” Renfro v. Unisys Corp., 671 F.3d 314, 321 (3d
Cir. 2011) (emphasis added) (internal citations omitted)
(quoting Srein, 323 F.3d at 221; and citing 29 U.S.C. §
11
1002(21)(A); In re Unisys Corp. Retiree Med. Benefits ERISA
Litig., 579 F.3d 220, 228 (3d Cir. 2009)). Thus, “the
threshold question is not whether the actions of some person
employed to provide services under a plan adversely affected
a plan beneficiary’s interest, but whether that person was
acting as a fiduciary (that is, performing a fiduciary function)
when taking the action subject to complaint.” Pegram, 530
U.S. at 226.
Before proceeding too deeply into our analysis, it is
necessary first to clarify precisely what Participants claim in
this case. Each Count that Participants levy against John
Hancock alleges the charging of excessive fees in breach of
fiduciary duty. See Participants’ Br. at 12.1 Counts I and II
of the Complaint challenge payment of the S&S fees,
alleging: (1) that contrary to John Hancock’s claim that the
S&S fees were used to pay for services by third parties, the
S&S fees were in fact revenue for John Hancock; and (2) that
the S&S fees were excessive because they were in excess of,
and duplicative of, the underlying funds’ 12b-1 fees. Counts
III and IV allege that John Hancock breached its fiduciary
responsibility by selecting for the Big Menu investment
options that charged 12b-1 fees, claiming that John Hancock
1
Counts VI and VII alleged, respectively, that John Hancock
wrongly included funds on the Big Menu that paid it revenue
sharing, and that John Hancock breached its fiduciary duty by
selecting a particular fund for inclusion on the Big Menu that
allegedly carried high fees with low returns. At oral
argument, counsel for Participants stated that while it was
“not withdrawing these two counts,” it was “limiting [them]
to claims of excessive fees.” Oral Arg. Rec. at 1:20-2:00.
Accordingly, we consider forfeited any claims of wrongdoing
other than the charging of excessive fees.
12
should have negotiated with the underlying funds for access
to a share class that did not impose these fees. Count V
alleges that John Hancock’s Big Menu should not have
included funds that paid certain advisor fees that Participants
allege were excessive.
Participants state that “[t]he alleged breach of fiduciary
duty consists solely of John Hancock charging excessive fees
for the performance of its fiduciary functions.” Reply Br. at 7.
But this is not quite correct: the question in this case is not
whether John Hancock acted as a fiduciary to the Plans at
some point and in some manner and then charged an
excessive fee for that fiduciary service; rather, the question is
whether John Hancock acted as a fiduciary to the Plans with
respect to the fees that it set. With that in mind, we now turn
to the parties’ arguments.2
B.
2
John Hancock briefly argues that Participants lack standing
to challenge any conduct by which they were not affected
because they have not suffered an injury-in-fact. See Lujan v.
Defenders of Wildlife, 504 U.S. 555, 560 (1992). We reject
this argument. As we will discuss, some of Participants’
asserted grounds for fiduciary status lack a nexus with the
wrongdoing alleged in the Complaint, and therefore cannot
provide a basis for relief. But John Hancock’s argument
conflates the injuries pleaded in the Complaint – the monetary
loss to the Plans caused by what Participants allege were
excessive fees – with the fiduciary duties that Participants
allege were breached. Participants have clearly alleged an
injury-in-fact – monetary loss. Whether that injury was
caused by John Hancock’s breach of a fiduciary duty, and
whether John Hancock had a fiduciary duty in the first place,
are questions for the merits, not for standing.
13
Participants allege that John Hancock is an ERISA
fiduciary because: (1) it exercised discretionary authority
respecting management of the Plans; and (2) it rendered
investment advice to the Plans for a fee.3 The Secretary joins
some of Participants’ arguments, and advances some of his
own. We will address each in turn.
1.
ERISA imposes a fiduciary duty on any person who
“exercises any discretionary authority or discretionary control
respecting management of [a] plan or exercises any authority
or control respecting management or disposition of its assets.”
29 U.S.C. § 1002(21)(A)(i). Subsection (i) is thus composed
of two discrete activities: (1) the exercise of discretionary
management or discretionary control over the plan; and (2)
the exercise of any authority or control over the management
or disposition of plan assets. The two prongs of subsection
(i) differentiate between “those who manage the plan in
general, and those who manage the plan assets.” Bd. of Trs.
of Bricklayers & Allied Craftsmen Local 6 of N.J. Welfare
3
Participants argue in a single sentence that John Hancock is
a fiduciary under subsection (iii) of 29 U.S.C. § 1002(21)(A),
which imposes a fiduciary duty on any person “to the extent .
. . he has any discretionary authority or discretionary
responsibility in the administration of [a] plan.” This brief
aside is insufficient to preserve the argument, and thus we do
not consider it. See Laborers’ Int’l Union of N. Am. v. Foster
Wheeler Corp., 26 F.3d 375, 398 (3d Cir. 1994) (“An issue is
waived unless a party raises it in its opening brief, and for
those purposes a passing reference to an issue . . . will not
suffice to bring that issue before this court.” (omission in
original) (quoting Simmons v. City of Phila., 947 F.2d 1042,
1066 (3d Cir. 1991)) (internal quotation marks omitted).
14
Fund v. Wettlin Assocs., Inc., 237 F.3d 270, 272 (3d Cir.
2001). Participants argue that John Hancock is a fiduciary
only under the first prong.
“Only discretionary acts of plan . . . management
trigger fiduciary duties.” Edmonson v. Lincoln Nat. Life Ins.
Co., 725 F.3d 406, 421-22 (3d Cir. 2013). Consequently, a
service provider owes no fiduciary duty to a plan with respect
to the terms of its service agreement if the plan trustee
exercised final authority in deciding whether to accept or
reject those terms. See Hecker v. Deere & Co., 556 F.3d 575,
583 (7th Cir. 2009), supplemented by 569 F.3d 708 (7th Cir.
2009). This makes sense: when a service provider and a plan
trustee negotiate at arm’s length over the terms of their
agreement, discretionary control over plan management lies
not with the service provider but with the trustee, who decides
whether to agree to the service provider’s terms.
The Seventh Circuit’s decision in Hecker stands
strongly for this point. There, participants in two 401(k)
plans sued their plans’ sponsor (Deere & Co.), record keeper
(Fidelity Trust), and investment advisor (Fidelity Research),
alleging breach of fiduciary duty for selecting investment
options with excessive fees and costs, and by failing to
disclose the fee structure. Hecker, 556 F.3d at 578. The plan
participants alleged that Fidelity Trust had the necessary
control to take on a fiduciary responsibility because it limited
the selection of funds available under the plans to those
managed by its sister company, Fidelity Research. Id. at 583.
This was irrelevant, in the Seventh Circuit’s view, because
even if Fidelity Research limited the scope of funds available
under its plan, it was ultimately the responsibility of the plan
sponsor – Deere & Co. – to decide which options to offer to
plan participants. Id. Fidelity Trust therefore lacked the
discretion necessary to confer upon it a fiduciary
15
responsibility.
Two years later, we decided Renfro. The allegations in
Renfro were similar to those made here: plan participants
sued not only the plan’s sponsor, but also the service
provider, Fidelity Management Trust Co., alleging breach of
fiduciary duty by selecting for the plan investment options
that carried excessive fees. 671 F.3d at 317, 319. Fidelity
conceded that it was a fiduciary with respect to certain
functions, but argued that it was not a fiduciary “with respect
to the challenged conduct of selecting and retaining
investment options” in the plan. Id. at 322-23.4 There, like
John Hancock argues here, Fidelity disclaimed any role in
making the final decision on what investment options to offer
plan participants. Compare id. at 323 (“The agreement
expressly disclaimed any role for Fidelity in selecting
investment options, stating, ‘[Fidelity entities] shall have no
responsibility for the selection of investment options under
the Trust.’”), with JA at 220, Berge Contract § 3
(“Contributions remitted to this Contract may be invested
only in the Investment Options selected by the
Contractholder”), and JA at 278, Scibal Contract § 3 (same).
Also like this case, the sponsor in Renfro was free to include
in its plan funds not offered by Fidelity. Compare 671 F.3d
at 319 (“The agreement did not prohibit Unisys from adding
non-Fidelity options to its plan, and administering them itself,
or from contracting with another company to administer non-
Fidelity investments.”), with JA at 219, Berge Contract § 1
(defining “Competing Investment Option” as a fund
4
Fidelity was a “directed trustee,” which “is a fiduciary
‘subject to proper directions’ of one of the plan’s named
fiduciaries.” Renfro, 671 F.3d at 323 (quoting 29 U.S.C. §
1103(a)(1)).
16
“available under the Plan, either in the Contract or
elsewhere”).
We concluded that, because Fidelity had “no
contractual authority to control the mix and range of
investment options, to veto” the sponsor’s selections, or to
prevent the sponsor from offering competing investment
options, it lacked the discretionary authority necessary to
create a fiduciary responsibility as to these activities. Renfro,
671 F.3d at 323. We further noted, relying on Hecker, that a
service provider “‘does not act as a fiduciary with respect to
the terms in the service agreement if it does not control the
named fiduciary’s negotiation and approval of those terms.’”
Id. at 324 (quoting Hecker, 556 F.3d at 583). The plan
participants alleged that they were injured by excessive fees
caused by the fee structure that the plan sponsor and Fidelity
had negotiated, but “Fidelity owe[d] no fiduciary duty with
respect to the negotiation of its fee compensation.” Id.
The Seventh Circuit’s recent decision in Leimkuehler
v. American United Life Insurance Co., 713 F.3d 905 (7th
Cir. 2013), cert. denied, 134 S. Ct. 1280 (2014), provides a
final point of guidance. In Leimkuehler, a plan and its trustee
sued the 401(k) service provider, American United Life
Insurance Co. (“AUL”), alleging that AUL breached a
fiduciary duty by engaging in the practice of revenue sharing.
Id. at 907-08. Under AUL’s revenue sharing plan, it received
a portion of the fees charged by the underlying mutual funds
to plan participants. Id. at 909. Like here, AUL created a big
menu of funds that it offered to the plan sponsor, who in turn
composed a small menu to offer to the plan participants. Id.
at 910. Also like here, plan participants invested their
contributions into separate accounts, which in turn were
invested in specific mutual funds. Id. at 908. In addition to
selecting which funds to include on its big menu, AUL chose
17
what share class would be offered, which in turn affected the
expense ratio paid by plan participants and the amount of
AUL’s revenue sharing. Id. at 909-10.
The Seventh Circuit concluded that AUL was not a
fiduciary with respect to revenue sharing. First, just as in
Hecker, AUL did not take on a fiduciary status with respect to
its “product design” – that is, the manner in which it crafted
its menu of investment options and what funds and share
classes it elected to include (and the accompanying expense
ratios of those options). Id. at 911. This was so because the
expense ratio for each fund AUL offered was fully disclosed,
and the plan sponsor “was free to seek a better deal with a
different 401(k) service provider if he felt that AUL’s
investment options were too expensive.” Id. at 912. Second,
the court rejected the argument that AUL’s maintenance of
separate sub-accounts created a fiduciary duty because the
alleged breach of fiduciary duty did not involve
mismanagement of the separate accounts. Id. at 913 (“AUL’s
control over the separate account can support a finding of
fiduciary status only if Leimkuehler’s claims for breach of
fiduciary duty arise from AUL’s handling of the separate
account. They do not.” (paragraph break omitted)).
Participants here identify three actions that purportedly
made John Hancock a fiduciary under the first prong of
subsection (i). They allege that John Hancock was a fiduciary
because it selected the investment options to be included in
the Big Menu, because it monitored the performance of the
funds on the Big Menu, and because, under the terms of its
contracts with the Berge and Scibal Plans, it had the authority
to add, remove, or substitute the investment options that it
offered to the Plans and to alter the fees it charged for its
services. See Participants’ Br. at 2. Participants’ position is
that “once a party has [the] status of a functional fiduciary,
18
they have all the obligations that ERISA imposes upon them,
and those obligations include the obligation not to charge
excessive fees.” Oral Arg. Rec. at 5:18-5:35.
Participants’ first argument is foreclosed by Renfro,
Hecker, and Leimkuehler, which together make clear that
John Hancock is not a fiduciary with respect to the manner in
which it composed the Big Menu, including its selection of
investment options and the accompanying fee structure. The
Big Menu’s fund selections and expense ratios are “product
design” features of the type that Leimkuehler concluded do
not give rise to a fiduciary duty. 713 F.3d at 911
(“[S]electing which funds will be included in a particular
401(k) investment product, without more, does not give rise
to a fiduciary responsibility . . . .”). Moreover, we expressly
stated in Renfro that a service provider “owes no fiduciary
duty with respect to the negotiation of its fee compensation.”
671 F.3d at 324.5 Here, even if they were incentivized to
select certain funds by John Hancock’s promise of
indemnification in the FSW, the trustees still exercised final
authority over what funds would be included on the Small
5
Participants argue that Renfro’s holding that a service
provider has no fiduciary duty in the negotiation of its fee
compensation is dictum that we are not obliged to follow.
Participants’ Br. at 35-36. We disagree. Renfro rejected the
argument that Fidelity could be liable as a co-fiduciary with
the plan sponsor for excessive fees and the selection of
investment options, because it simply was not a fiduciary
with respect to that conduct. See 671 F.3d at 324; see also 29
U.S.C. § 1105(a) (allowing “a fiduciary . . . [to] be liable for a
breach of fiduciary responsibility of another fiduciary”
(emphasis added)).
19
Menus (and, by extension, what the accompanying expense
ratios would be). Nothing prevented the trustees from
rejecting John Hancock’s product and selecting another
service provider; the choice was theirs. See Hecker, 556 F.3d
at 583 (recognizing that “a service provider does not act as a
fiduciary with respect to the terms in the service agreement if
it does not control the named fiduciary’s negotiation and
approval of those terms”).6
6
Participants urge that the District Court erred in following
Renfro and Leimkuehler, and that instead we should take
guidance from two out-of-circuit district court decisions,
Charters v. John Hancock Life Insurance Co., 583 F. Supp.
2d 189 (D. Mass. 2008), and Santomenno v. Transamerica
Life Insurance Co., No. 12-2782, 2013 WL 603901 (C.D.
Cal. Feb. 19, 2013). We find neither case persuasive.
The plaintiff in Charters sued the service provider
over AMC revenue and for receiving revenue sharing paid by
the underlying mutual funds. 583 F. Supp. 2d at 192. The
district court concluded that the provider was a fiduciary
because its contract gave it discretion to set the AMC up to a
contractual maximum or exceed the contractual maximum
upon three-months’ notice to the sponsor, and because it
imposed a 2% termination fee, which the district court
believed limited the sponsor’s ability to freely reject changes.
Id. 197-99. We find Charters unavailing. First, it predates
Renfro and Leimkuehler, and for that reason alone the
persuasive value of its holding that a service provider owes a
fiduciary duty with respect to its fee arrangement is sharply
diminished. Second, in this case, John Hancock did not
impose a penalty, and therefore there is no obstacle to
cancellation that limits the trustees’ discretion to reject
20
Participants’ second argument is that John Hancock
became a fiduciary by monitoring the performance of the
investment options offered on the Big Menu through its Fund
Check and Underlying Fund Replacement Regimen
programs. Participants’ Br. at 34. But we do not see how
monitoring the performance of the funds that it offers and
relaying that information to the trustees, who retain ultimate
authority for selecting the funds to be included on the Small
Menus, gives John Hancock discretionary control over
anything, much less management of the Plans. See, e.g, JA at
399 (stating in the FSW that “Plan fiduciaries are still
proposed changes.
Transamerica is even less persuasive. There, the
district court rejected Hecker’s holding that a service provider
has no fiduciary duty with respect to the terms of its
compensation if the named fiduciary is free to negotiate and
approve or reject the contract, calling it “formalistic line-
drawing” that would lead to the “reductio ad absurdum” of
allowing a service provider to negotiate for a 99% fee.
Transamerica, 2013 WL 603901, at *6. First, this reasoning
is flatly inconsistent with our controlling decision in Renfro,
which cited Hecker with approval for the proposition that
there is no fiduciary duty with regard to contract negotiations.
See 671 F.3d at 324. Second, as John Hancock correctly
observes, Transamerica’s logic is flawed because any plan
sponsor who agreed to a 99% fee arrangement would itself be
liable for breaching its fiduciary duty to “defray[] reasonable
expenses of administering the plan.” 29 U.S.C. §
1104(a)(1)(A)(ii). Therefore, it is unnecessary to impose a
fiduciary duty on the service provider in order to protect plan
assets from excessive fees.
21
required to properly discharge their responsibilities in
determining that John Hancock’s investment process and fund
lineup is appropriate for their plan”).
Participants’ third argument – that John Hancock
became a fiduciary by retaining the authority to change the
investment options offered on the Big Menu and alter the fees
that it charged – likewise fails. Reply Br. at 16; JA at 226,
Berge Contract § 15. First, this activity lacks a nexus with
the conduct complained of in the Complaint. As John
Hancock and amicus ACLI observe, Participants do not allege
that John Hancock breached a fiduciary duty by altering an
investment option on the Big Menu or by altering their fees.
Rather, their claim is that the fees John Hancock charged
(which, as we note above, the Plan sponsors were free to
accept or reject) were excessive. Participants urge that
focusing on their specific allegations is a feint designed “to
set the stage for John Hancock arguing . . . that [Participants’]
arguments regarding John Hancock’s status as an ERISA
fiduciary are not properly pled and therefore should not be
considered.” Reply Br. at 3. But in fact the opposite is true:
it is clear that a complaint alleging breach of ERISA fiduciary
duty must plead that the defendant was acting as a fiduciary
“when taking the action subject to complaint.” Pegram, 530
U.S. at 226 (emphasis added). Lacking this nexus, John
Hancock’s alleged ability to alter its funds or fees cannot give
rise to a fiduciary duty in this case. Cf. Leimkuehler, 713 F.3d
at 913 (recognizing that “control over [a] separate account
can support a finding of fiduciary status only if [the] claims
for breach of fiduciary duty arise from [the] handling of the
separate account” (emphasis added)). Second, even assuming
a nexus between the alleged breach and John Hancock’s
ability to substitute funds, Participants still fail to show that
John Hancock exercised the discretion over plan management
22
necessary to make it a fiduciary. Although John Hancock did
have the contractual right to alter the Big Menu or change its
fees, it could do so only after giving the trustee “adequate
notice and sufficient information to decide whether to accept
or reject any changes that would be fiduciary decisions.” Id.
If the trustee rejected the changes, he could “terminate the
Contract without penalty.”7 Id. Thus, ultimate authority still
resided with the trustees, who had the choice whether to
accept or reject John Hancock’s changes.
Participants’ attempt to establish that John Hancock
acted as a fiduciary under subsection (i) of 29 U.S.C. §
1002(21)(A) fails because its arguments are foreclosed by
precedent or lack a nexus with the claims in the Complaint,
and we conclude that the District Court did not err in rejecting
their arguments.
2.
Participants argue that John Hancock is an ERISA
fiduciary because it has “render[ed] investment advice [to the
Plans] for a fee or other compensation.” 29 U.S.C. §
1002(21)(A)(ii). At the outset, this alleged basis of fiduciary
responsibility bears no nexus to the wrongdoing alleged in the
Complaint: Participants allege the charging of excessive fees,
not the rendering of faulty investment advice. See
7
The Berge Plan indicates that “[d]iscontinuance and other
charges may still be available” upon cancellation “in
accordance with the terms of the Contract and the Charge
Schedule.” JA at 226, Berge Contract § 15. However, both
Plans indicate that the discontinuance fee was “0.000%.” JA
at 230, Berge Contract Withdrawal/Discontinuance Charge
Scale; JA at 291, Scibal Contract Withdrawal and
Discontinuance Charge Scales.
23
Leimkuehler, 713 F.3d at 913-14. But even if there were such
a nexus, we would reject this argument because Participants
have failed to plead that John Hancock was an investment
advice fiduciary within the meaning of ERISA.
The Department of Labor (“DOL” or “Department”)
has promulgated a regulation setting forth a five-factor test
for determining whether an entity has rendered “investment
advice” for purposes of ERISA fiduciary status. An entity is
an investment advice fiduciary if it:
[1] [R]ender[ed] advice to the
plan as to the value of securities
or other property, or makes
recommendation as to the
advisability of investing in,
purchasing, or selling securities or
other property . . . [2] on a regular
basis . . . [3] pursuant to a mutual
agreement, arrangement or
understanding, written or
otherwise, between such person
and the plan or a fiduciary with
respect to the plan, [4] that such
services will serve as a primary
basis for investment decisions
with respect to plan assets, and [5]
that such person will render
individualized investment advice
to the plan based on the particular
needs of the plan.
29 C.F.R. § 2510.3-21(c)(1). “All five factors are necessary
to support a finding of fiduciary status.” Thomas, Head &
24
Griesen Emps. Trust v. Buster, 24 F.3d 1114, 1117 (9th Cir.
1994).
As a threshold matter, Participants argue that the DOL
regulation is invalid as contrary to the plain language of §
1002(21)(A)(ii). In support of this argument, they first
suggest that the Department no longer stands by the
regulation because it “engrafts additional requirements for
establishing fiduciary status under 29 U.S.C.
§ 1002(21)(A)(ii) that narrow the plain language of this
subsection.” Participants’ Br. at 21. Notably, the Secretary
does not join this argument, and for good reason.
The regulation dates to 1975, and in 2010 the DOL
proposed a new rule that would have broadened the
circumstances in which a person would be deemed an ERISA
fiduciary by reason of having rendered investment advice.
See Definition of the Term “Fiduciary,” 75 Fed. Reg. 65263
(proposed Oct. 22, 2010). However, in a press release issued
on September 19, 2011, the Department stated that it would
“re-propose” the rule in order to “benefit from additional
input, review and consideration.” See News Release, U.S.
Dep’t of Labor, US Labor Department’s EBSA to Re-Propose
Rule on Definition of a Fiduciary (Sept. 19, 2011), available
at http://www.dol.gov/ebsa/newsroom/2011/11-1382-
NAT.html. The parties dispute whether the Department
actually “withdrew” consideration of the new rule, but
whether it did so or not is irrelevant because the new rule has
not been adopted, and unless and until it becomes law, the
current regulation remains binding. See Depenbrock v. Cigna
Corp., 389 F.3d 78, 85 (3d Cir. 2004).
We defer to the Department’s reasonable interpretation
of ambiguous provisions of ERISA. See Matinchek v. John
Alden Life Ins. Co., 93 F.3d 96, 100-01 (3d Cir. 1996); see
25
also Chevron U.S.A. Inc. v. Natural Res. Def. Council, Inc.,
467 U.S. 837, 843-33 (1984). While acknowledging that the
DOL’s proposed regulation never went into effect,
Participants argue that its mere proposal somehow weakens
the deference we owe the current regulation under Chevron.
This is incorrect because “a proposed regulation does not
represent an agency’s considered interpretation of its statute,”
Depenbrock, 389 F.3d at 85 (internal quotation marks
omitted) (quoting Commodity Futures Trading Comm’n v.
Schor, 478 U.S. 833, 845 (1986)), and therefore it does not
supplant a prior regulation that was the result of the agency’s
considered interpretation. See Littriello v. United States, 484
F.3d 372, 379 (6th Cir. 2007) (“Plainly, an agency does not
lose its entitlement to Chevron deference merely because it
subsequently proposes a different approach in its
regulations.”).
Thus, the normal Chevron analysis applies. Under that
familiar rubric, “we ask first ‘whether Congress has directly
spoken to the precise question at issue. If so, courts, as well
as the agency, must give effect to the unambiguously
expressed intent of Congress.’” Eid v. Thompson, 740 F.3d
118, 123 (3d Cir. 2014) (quoting United States v. Geiser, 527
F.3d 288, 292 (3d Cir. 2008)). If, on the other hand, the
statute is ambiguous as to the question at hand, “we give
‘controlling weight’ to the agency’s interpretation unless it is
‘arbitrary, capricious, or manifestly contrary to the statute.’”
Id. (quoting Geiser, 527 F.3d at 292).
Participants marshal little in the way of support for
their Chevron argument. Section 1002(21)(A)(ii) imposes
fiduciary status on any person who “renders investment
advice for a fee or other compensation.” Participants
tautologically argue, then, that “Congress has unambiguously
expressed its intent that any party who renders investment
26
advice for a fee is an ERISA fiduciary.” Participants’ Br. at
22 (internal quotation marks omitted). This is true insofar as
that is what the statute says, but this observation tells us
nothing about what the provision means. “Chevron deference
is premised on the idea that where Congress has left a gap or
ambiguity in a statute within an agency’s jurisdiction, that
agency has the power to fill in or clarify the relevant
provisions.” Core Commc’ns, Inc. v. Verizon Pa. Inc., 493
F.3d 333, 343 (3d Cir. 2007) (citing Chevron, 467 U.S. at
843-44). ERISA does not define “investment advice,” nor
does it provide a way to determine when such an advisory
relationship has occurred. This is precisely the type of
legislative gap-filling that we entrust to an agency’s sound
discretion.8
The DOL regulation is valid, and under it Participants
have failed to plead that John Hancock was an investment
advice fiduciary. In order for a fiduciary relationship to arise
under subsection (ii), John Hancock must have rendered
investment advice to the plans “pursuant to a mutual
agreement, arrangement or understanding.” 29 C.F.R.
§ 2510.3-21(c)(1)(ii)(B). Participants argue that a mutually
understood advisory relationship existed because “John
Hancock provide[d] . . . investment advice pursuant to
contracts entered into with employer sponsors such as Berge
and Scibal.” Participants’ Br. at 23. But far from showing
mutual assent to an advisory relationship, the contracts
between the Plans and John Hancock show just the opposite:
that John Hancock expressly disclaimed taking on any
8
Participants do not even attempt to argue Chevron step two,
that the DOL regulation is arbitrary, capricious, or manifestly
contrary to the statute. See Participants’ Br. at 22.
27
fiduciary relationship. See JA at 226, Berge Contract § 15
(“[John Hancock] does not assume the responsibility of the
Contractholder, Plan Administrator, Plan Sponsor or any
other Fiduciary of the Plan . . . .”); JA at 285, Scibal Contract
§ 17 (“By performing these services, [John Hancock] does
not assume the responsibility of the Contractholder, Plan
Administrator or any other Fiduciary of the Plan.”).
Similarly, in the FSW John Hancock stated that “we are not a
fiduciary.” JA at 414. It is true that, subject to limited
exceptions not relevant here, ERISA precludes fiduciaries
from contracting away their responsibilities. See 29 U.S.C. §
1110(a) (“[A]ny provision in an agreement or instrument
which purports to relieve a fiduciary from responsibility or
liability for any responsibility, obligation, or duty under this
part shall be void as against public policy.”); In re Schering
Plough Corp. ERISA Litig., 589 F.3d 585, 593 (3d Cir. 2009).
But this does not answer the question of whether John
Hancock has taken on fiduciary status in the first place.
Participants point only to the contracts themselves as support
for the existence of a mutually assented-to advisory
relationship between the parties, but the terms of the contracts
belie their argument.
This alone is enough to defeat Participants’ argument
and we need not proceed further. Buster, 24 F.3d at 1117.
Participants have failed to satisfactorily plead that John
Hancock was an investment advice fiduciary under ERISA.
3.
The Secretary argues that John Hancock had fiduciary
status under both prongs of subsection (i), and as a plan
administrator under subsection (iii). We reject these
arguments as meritless or waived.
The Secretary first argues that John Hancock exercised
28
“discretionary authority or discretionary control” over plan
management under the first prong of 29 U.S.C.
§ 1002(21)(A)(i), because it retained “the authority to
unilaterally delete and substitute” investment options from the
Big Menu, even if it did not actually exercise that authority.
Sec’y of Labor Br. at 15. The Seventh Circuit rejected this
precise argument in Leimkuehler, describing it as an
“unworkable” “‘non-exercise’ theory of exercise” that
“conflicts with a common-sense understanding of the
meaning of ‘exercise,’ is unsupported by precedent, and
would expand fiduciary responsibilities under Section
1002(21)(A) to entities that took no action at all with respect
to a plan.” 713 F.3d at 914. “Section 1002(21)(A)’s ‘reach is
limited to circumstances where the individual actually
exercises some authority.’” Id. (quoting Trs. of the Graphic
Commc’ns Int’l Union Upper Midwest Local 1M Health &
Welfare Plan v. Bjorkedal, 516 F.3d 719, 733 (8th Cir.
2008)). Moreover, whether John Hancock could substitute
investment options on the Big Menu is not relevant to the
injury that Participants allege, charging excessive fees.
Next, the Secretary argues that John Hancock was a
fiduciary because it “exercise[d] . . . authority or control
respecting management or disposition of [Plan] assets,” see
29 U.S.C. § 1002(21)(A)(i), and because it had discretionary
control over plan administration, id. § 1002(21)(A)(iii). Both
arguments are waived. As we noted above, Participants have
not argued that John Hancock exercised control over plan
assets, and their single-sentence reference to plan-
administrator fiduciary status failed to preserve that
argument. Laborers’ Int’l, 26 F.3d at 398. The Secretary
cannot, as amicus, resurrect on appeal issues waived by
Participants. See N.J. Retail Merchs. Ass’n v. Sidamon-
Eristoff, 669 F.3d 374, 383 n.2 (3d Cir. 2012) (“‘Although an
29
amicus brief can be helpful in elaborating issues properly
presented by the parties, it is normally not a method for
injecting new issues into an appeal, at least in cases where the
parties are competently represented by counsel.’” (quoting
Universal City Studios, Inc. v. Corley, 273 F.3d 429, 445 (2d
Cir. 2001)).
IV.
For the reasons that we have discussed, we conclude
that Participants have failed to plead that John Hancock was a
fiduciary under ERISA with respect to the actions of John
Hancock that Participants challenge. The order of the District
Court granting John Hancock’s motion to dismiss is affirmed.
30