Frederick Rozo v. Principal Life Insurance Co.

United States Court of Appeals
For the Eighth Circuit
___________________________
No. 18-3310
___________________________
Frederick Rozo
lllllllllllllllllllllPlaintiff - Appellant
v.
Principal Life Insurance Company
lllllllllllllllllllllDefendant - Appellee
Principal Financial Group, Inc.
lllllllllllllllllllllDefendant
_____________
American Council of Life Insurers; Chamber of Commerce of the United States of
America; American Benefits Council
lllllllllllllllllllllAmici on Behalf of Appellee(s)
____________
Appeal from United States District Court
for the Southern District of Iowa - Des Moines
____________
Submitted: October 18, 2019
Filed: February 3, 2020
____________
Before SMITH, Chief Judge, GRUENDER and BENTON, Circuit Judges.
____________
BENTON, Circuit Judge.
Frederick Rozo invested in an Employee Retirement Income Security Act
(ERISA) plan offered by Principal Life Insurance Company. The plan set a
guaranteed rate of return every six months. Rozo alleges that Principal, a service
provider to the plan, violated ERISA. The district court granted Principal summary
judgment, finding that it is not a fiduciary when setting the rate. Having jurisdiction
under 28 U.S.C. § 1291, this court reverses.
Principal offers a 401(k) retirement plan—a Principal Fixed Income Option
(“plan”)—which gives participants a guaranteed rate of return, the Composite
Crediting Rate. Principal unilaterally calculates this CCR every six months. Before
the CCR takes effect—typically a month in advance—Principal notifies plan
sponsors, which alert the participants.
If a plan sponsor wants to reject the proposed CCR, it must withdraw its funds,
facing two options: (1) pay a surrender charge of 5% or (2) give notice and wait 12
months. If a plan participant wishes to exit, he or she faces an “equity wash.” They
can immediately withdraw their funds, but not reinvest in plans like the PFIO for
three months.
Rozo, a former plan participant, alleges that Principal’s setting of the CCR
breaches its fiduciary duty and engages in prohibited transactions under ERISA.
Both counts rely on Principal being a fiduciary. Alternatively, if Principal is not a
fiduciary, Rozo pleads that Principal is engaging in prohibited transactions as a party
in interest.
After certifying a class action, the district court granted Principal summary
judgment, concluding it is not a fiduciary nor liable as a party in interest. Rozo
appeals.
-2-
This court reviews de novo a district court’s grant of summary judgment
viewing genuinely disputed facts “in the light most favorable to the nonmoving
party.” Torgerson v. City of Rochester, 643 F.3d 1031, 1042 (8th Cir. 2011) (en
banc), quoting Ricci v. DeStefano, 557 U.S. 557, 586 (2009). If the record taken as
a whole could not lead a rational trier of fact to find for the nonmoving party,
summary judgment should be granted. Torgerson, 643 F.3d at 1042, citing Ricci, 557
U.S. at 586.
I.
Principal is a fiduciary when it sets the CCR. “[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 . . .” 29 U.S.C. §
1002(21)(A); Maniace v. Commerce Bank of Kansas City, N.A., 40 F.3d 264, 267
(8th Cir. 1994) (“Clearly, discretion is the benchmark for fiduciary status under
ERISA.”). See also Pegram v. Herdrich, 530 U.S. 211, 226 (2000) (“In every case
charging breach of ERISA fiduciary duty, then, the threshold question is . . . whether
that person was acting as a fiduciary . . . when taking the action subject to
complaint.”).
The parties agree that a recent Tenth Circuit decision should guide this appeal.
Teets v. Great-West Life & Annuity Ins. Co., 921 F.3d 1200 (10th Cir. 2019). Teets
determines that a service provider acts as a fiduciary: if (1) it “did not merely follow
a specific contractual term set in an arm’s-length negotiation” and (2) it “took a
unilateral action respecting plan management or assets without the plan or its
participants having an opportunity to reject its decision.” Id. at 1212. See McCaffree
Financial Corp. v. Principal Life Ins. Co., 811 F.3d 998, 1003 & n.2 (8th Cir. 2016)
(analyzing (1) “adherence to” contract terms “clearly identified” and (2) “contract
empowered [plan sponsor] to reject” service provider’s act).
-3-
This court agrees that Teets’s two-part test controls because it properly
interprets ERISA. If the provider’s actions (1) conform to specific contract terms or
(2) a plan and participant can freely reject it, then the provider is not acting with
“authority” or “control” respecting the “disposition of [the plan’s] assets.” See 29
U.S.C. § 1002(21)(A); Black’s Law Dictionary (11th ed. 2019) (defining “authority”
as “[t]he official right or permission to act, especially to act legally on another’s
behalf; especially, the power of one person to affect another’s legal relations by acts
done in accordance with the other’s manifestations of assent”; defining “control” as
“[t]o exercise power or influence over”).
II.
At Teets step one, Principal’s setting of the CCR does not “conform[] to a
specific term of its contract with the employer plan.” Teets, 921 F.3d at 1212. Every
six months, Principal sets the CCR with no specific contract terms controlling the
rate. Principal calculates the CCR based on past rates in combination with a new rate
that it unilaterally inputs.
Principal asserts that it is acting pursuant to the contract because it authorizes
Principal to set the CCR. This assertion conflates two issues. Although the contract
empowers Principal to set the CCR, the rate is not a “specific term[] of the contract.”
Teets, 921 F.3d at 1212. When Principal notifies a plan sponsor of the proposed
CCR, the sponsor has not agreed to it. A service provider may be a fiduciary when
it exercises discretionary authority, even if the contract authorizes it to take the
discretionary act.
Prior case law “stands for the proposition that if a specific
term (not a grant of power to change terms) is bargained
for at arm’s length, adherence to that term is not a breach
of fiduciary duty. No discretion is exercised when an
insurer merely adheres to a specific contract term. When
-4-
a contract, however, grants an insurer discretionary
authority, even though the contract itself is the product of
an arm’s length bargain, the insurer may be a fiduciary.”
Ed Miniat, Inc. v. Globe Life Ins. Group, Inc., 805 F.2d 732, 737 (7th Cir. 1986).
Principal cites inapposite cases that did not find fiduciary status because—unlike the
setting of the CCR here—the provider’s act was contractually predetermined. See
McCaffree, 811 F.3d at 1003 (finding no fiduciary status in a case alleging excessive
fees because “the contract between [the parties] clearly identified each separate
account’s management fee and authorized [defendant] to pass through additional
operating expenses to participants in these accounts.”) (emphasis added);
Santomenno v. Transamerica Life Ins. Co., 883 F.3d 833, 841 (9th Cir. 2018)
(ruling no fiduciary capacity for “withdrawal of predetermined fees”) (emphasis
added); Hecker v. Deere & Co., 556 F.3d 575, 583 (7th Cir. 2009) (contract giving
plan sponsor “the final say” on investment options).
III.
At Teets step two, the plan sponsors here do not “have the unimpeded ability
to reject the service provider’s action or terminate the relationship.” Teets, 921 F.3d
at 1212. If a plan sponsor wishes to reject the CCR, it must leave the plan, with two
options: (1) pay a 5% surrender charge or (2) have its funds remain in the plan for
12 months. Charging a 5% fee on a plan’s assets impedes termination. Likewise,
holding a plan’s funds for 12 months after it wishes to exit impedes termination.1
1
The delay probably subjects a plan’s funds to at least one new CCR, despite
the plan sponsor never approving the rate change. Neither party confirms that a plan
sponsor’s funds are subject to a CCR change during the 12-month delay. However,
the plan’s contract says they are, stating, “If [Principal] delay[s] payment as permitted
under this Section [regarding termination of contract], amounts to be paid or
transferred will continue to earn interest at the rate determined pursuant to each
Applicable Schedule as described in Article II, Section 2 until the transfer occurs.”
Article II, Section 2 governs the setting of the rate.
-5-
Principal, therefore, is a fiduciary exercising control and authority over the CCR. See
Chicago Bd. Options Exch., Inc. (CBOE) v. Connecticut General Life Ins. Co., 713
F.2d 254, 260 (7th Cir. 1983) (finding fiduciary status because a restriction requiring
10 years to withdraw funds “lock[ed]” in the plan sponsor).
Principal argues that the surrender penalty and delay are not impediments
because they are in the plan contract. This argument is misplaced. Fiduciary status
focuses on the act subject to complaint. See Pegram, 530 U.S. at 226. Here, Rozo
complains about the setting of the CCR. Because plan sponsors do not have an
opportunity to agree to the CCR until after it is proposed, the CCR is a new contract
term. This court, therefore, must decide if plan sponsors can freely reject the term.
See Teets, 921 F.3d at 1212. It does not matter that the barriers to rejecting the CCR
are in the contract. See, e.g., CBOE, 713 F.2d at 256 (10% withdrawal limit in
contract); Charters v. John Hancock Life Ins. Co., 583 F. Supp. 2d 189, 199 (D.
Mass. 2008) (termination penalties in contract).
Relatedly, Principal asserts, without support in the record, that enforcing the
surrender charge at the time of exit is no different than having the plan sponsor pay
an up-front charge for free exit later. Not true. The critical inquiry here is the plan
sponsor’s choice at the time it receives the proposed CCR. If impeded then, Principal
exercises control.
Principal also believes that Teets, which found no fiduciary status, controls.
The investment vehicle there, although similar to the one here, differs in one critical
respect. The Teets service provider had a “contractual option to impose a 12-month
waiting period on plan withdrawal,” but never exercised it. Teets, 921 F.3d at 1217
(emphasis added). Here, Principal imposes the 12-month delay.
Finally, Principal argues that a participant’s ability to freely reject the
CCR—regardless of the plan sponsor’s ability—negates fiduciary status for the
-6-
service provider. Teets summarizes ERISA case law as finding fiduciary status if
either a plan sponsor or a participant is impeded from rejecting the service provider’s
act. See Teets, 921 F.3d at 1213, citing CBOE, 713 F.2d at 260 (“Fiduciary status
turns on whether the service provider can force plans or participants to accept its
choices about plan management or assets.”) (emphasis added), and citing Charters,
583 F. Supp. at 199 (“And when the plan or the plan participants cannot reject the
service provider’s action or terminate the contract without interference or penalty, the
service provider is a functional fiduciary.”) (emphasis added). Because the sponsor
here is impeded, the participant’s ability to reject the CCR does not negate Principal’s
fiduciary status.
IV.
Because Principal is a fiduciary when it sets the CCR, this court need not
address Rozo’s argument alleging that Principal is conducting a prohibited
transaction as a party in interest.
This court reverses and remands to the district court for proceedings consistent
with this opinion.
*******
The judgment is reversed.
______________________________
-7-