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McCaffree Fin. Corp. v. Principal Life Ins. Co.

United States District Court, S.D. Iowa, Central Division

December 10, 2014


Page 654

For McCaffree Financial Corp., on behalf of a class of those similarly situated, on behalf of The McCaffree Financial Corp. Employee Retirement Program, Plaintiff: Joseph R Gunderson, LEAD ATTORNEY, GUNDERSON SHARP LLP, DES MOINES, IA; Alexander T. Ricke, John F. Edgar, John M. Edgar, PRO HAC VICE, EDGAR LAW FIRM LLC, Kansas City, MO; Garrett W Wotkyns, Patrick J. Van Zanen, PRO HAC VICE, SCHNEIDER WALLACE COTTRELL KONECKY LLP, Scottsdale, AZ; Jason H. Kim, PRO HAC VICE, SCHNEIDER WALLACE COTTRELL KONECKY, San Francisco, CA; Michael C McKay, SCHNEIDER WALLACE COTTRELL KONECKY LLP, Scottsdale, AZ; Todd M Schneider, SCHNEIDER WALLACE COTTRELL KONECKY LLP, San Francisco, CA.

For Principal Life Insurance Company, Defendant: Angel Anna West, LEAD ATTORNEY, NYEMASTER GOODE PC, DES MOINES, IA; Eric S Mattson, Joel S Feldman, LEAD ATTORNEYS, PRO HAC VICE, SIDLEY AUSTIN LLP, Chicago, IL.

Page 655




This is a case brought under the Employee Retirement Income Security Act of 1974 (" ERISA" ), 29 U.S.C. § § 1001 et seq.

Page 656

In all cases such as this, the threshold question is the same: whether the alleged fiduciary was acting as a fiduciary when taking the action subject to the complaint. Pegram v. Herdrich, 530 U.S. 211, 226, 120 S.Ct. 2143, 147 L.Ed.2d 164 (2000). Plaintiff McCaffree Financial Corp. alleges Defendant Principal Life Insurance Company is a fiduciary under three subsections of 29 U.S.C. § 1002(21)(A)(i)-(iii). [Compl. ¶ 53, ECF No. 1]. Raising two arguments, Defendant contends it is not a fiduciary. [Defendant's Motion to Dismiss (" Def.'s Mot. to Dismiss" ), ECF No. 34; Def. Principal Life Ins. Co.'s Mem. in Supp. of Mot. to Dismiss (" Def.'s Br." ) at 3-11, ECF No. 34-1]. Because the Court concludes Defendant was not acting as a fiduciary at the time the fees and expenses were negotiated, Defendant is not a fiduciary under 29 U.S.C. § 1002(21)(A)(i). This conclusion is not dispositive of all Plaintiff's allegations, however, so the Court must consider Defendant's second argument for dismissal. Because the Court concludes the remaining acts alleged to support fiduciary status lack a " nexus" with the alleged excessive fees, Defendant is not a fiduciary under § 1002(21)(A)(ii) or § 1002(21)(A)(iii). Accordingly, the Court grants Defendant's Motion to Dismiss.

A. Procedural Background of this Motion

Defendant moves to dismiss the Class Action Complaint (" Complaint" ) with prejudice pursuant to Federal Rule of Civil Procedure 12(b)(6).[1] [Def.'s Mot to Dismiss at 1]. Plaintiff filed a response (" Pl.'s Br." ) [ECF No. 42], and Defendant filed a reply [ECF No. 43]. Defendant requested oral argument, which was held on October 23, 2014. [ECF No. 51; see also Transcript, ECF No. 52]. Before oral argument was held, Defendant filed supplemental authority [ECF No. 47], and Plaintiff filed objections [ECF No. 48]. Also, Defendant clarified previously cited authority [ECF No. 49], and Plaintiff responded [ECF No. 50]. The matter is fully submitted.


A. General Principles Under Rule 12(b)(6)

Federal Rule of Civil Procedure 12(b)(6) provides a motion to dismiss for " failure to state a claim upon which relief can be granted." Fed.R.Civ.P. 12(b)(6). Rule 8 requires a complaint to contain " a short and plain statement of the claim showing that the pleader is entitled to relief." Fed.R.Civ.P. 8(a)(2). To meet this standard, and thus survive a motion to dismiss under Rule 12(b)(6), " a complaint must contain sufficient factual matter, accepted as true, to 'state a claim to relief that is plausible on its face.'" Braden v. Wal-Mart Stores, Inc., 588 F.3d 585, 594 (8th Cir. 2009) (quoting Ashcroft v. Iqbal, 556 U.S. 662, 678, 129 S.Ct. 1937, 173 L.Ed.2d 868 (2009)). A claim is plausible on its face " when the plaintiff pleads factual content that allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged." Iqbal, 556 U.S. at 678. Although the plausibility standard " is not akin to a 'probability requirement,'" it does demand " more than a sheer possibility that a defendant has acted unlawfully." Id. (quoting Bell A. Corp. v. Twombly, 550 U.S. 544, 545, 127 S.Ct. 1955, 167 L.Ed.2d 929 (2007)).

Page 657

Several principles guide courts assessing whether a complaint states a plausible claim for relief. Braden, 588 F.3d at 594. Courts must accept as true a plaintiff's factual allegations, but they need not accept as true a plaintiff's legal conclusions. Brown v. Medtronic, Inc., 628 F.3d 451, 459 (8th Cir. 2010). Courts must draw all reasonable inferences in favor of plaintiffs. Crooks v. Lynch, 557 F.3d 846, 848 (8th Cir. 2009). " Threadbare recitals of the elements of a cause of action, supported by mere conclusory statements, do not suffice." Iqbal, 556 U.S. at 678.

Still more principles guide courts. Courts may look to documents attached to or incorporated within a complaint " to determine whether a plaintiff has stated a plausible claim." Brown, 628 F.3d at 459-60. And instead of parsing complaints to determine whether isolated allegations are plausible, courts should read complaints as a whole. Braden, 588 F.3d at 594. After all, evaluating a complaint " is 'a context-specific task that requires the reviewing court to draw on its judicial experience and common sense.'" Id. (quoting Iqbal, 556 U.S. at 679).

Consistent with these principles, the Supreme Court of the United States has developed a two-pronged approach for deciding whether a complaint states a plausible claim for relief. Iqbal, 556 U.S. at 679. First, courts should begin by " identifying pleadings that, because they are no more than conclusions, are not entitled to the assumption of truth." Id. After disregarding these conclusions, courts should assume the veracity of the remaining factual allegations and " determine whether they plausibly give rise to an entitlement to relief." Id. " The facts alleged in the complaint 'must be enough to raise a right to relief above the speculative level.'" Clemons v. Crawford, 585 F.3d 1119, 1124 (8th Cir. 2009) (quoting Drobnak v. Andersen Corp., 561 F.3d 778, 783 (8th Cir. 2009)).

B. Principles Specific to Rule 12(b)(6) Motions in ERISA Cases

This ERISA case implicates other important tenets. Mindful of Congress's intent to give individuals " an important role in enforcing ERISA's fiduciary duties," the United States Court of Appeals for the Eighth Circuit has instructed courts to " be cognizant of the practical context of ERISA litigation." Braden, 588 F.3d at 598. Courts must take account of plaintiffs' generally limited access to information at the pleading stage. Id. Courts must not forget the effect of requiring plaintiffs, in order to successfully state a claim, to plead " facts which tend systemically to be in the sole possession of defendants." Id. If courts require plaintiffs to plead such facts to state a claim, ERISA's remedial scheme will fail. Id. If the remedial scheme fails, " the crucial rights secured by ERISA will suffer." Id. Hence, before concluding an ERISA complaint's factual allegations " do not support a plausible inference that the plaintiff is entitled to relief," courts must perform a " careful and holistic evaluation" of those allegations. Id.


Accepting the truth of Plaintiff's factual allegations, as the Court must at this stage, Brown, 628 F.3d at 459, the relevant facts are as follows: Plaintiff sponsors for its employees a retirement plan governed by ERISA, the McCaffree Financial Corp. Employee Retirement Program (" McCaffree

Page 658

Plan" ) (a 401(k) plan).[2] [Compl. ¶ ¶ 1, 4]. Plaintiff is the administrator of the McCaffree Plan. Id. Defendant is a life insurance company and is part of Principal Financial Group. Id. ¶ ¶ 6-7. Defendant provides services to 401(k) plans. Id. ¶ 8.

Plaintiff and Defendant entered into a " Group Annuity Contract" dated September 1, 2009 (and subsequently amended). Id. ¶ 5. Under this contract, Defendant offers investment options for participants in the McCaffree Plan and provides other services in connection with the Plan in exchange for various fees and charges. Id. ¶ 13. The Group Annuity Contract includes a " Separate Investment Account Rider" that allows participants in the McCaffree Plan to invest in Defendant's " Separate Accounts." Id. ¶ 14.[3] Under the Separate Investment Account Rider, Defendant agrees to make available a curated menu of investment options that will be chosen from 63 separate accounts. Id. ¶ 23; [ see also Def.'s Mot. to Dismiss, Ex. A, Separate Investment Account Rider at 1-2; ECF No. 34-3]. Defendant reserves the right to limit both the number of separate accounts available under the contract and the number available to each Member. [Compl. ¶ 17; Separate Investment Account Rider at 1]. Defendant also reserves the right to allow participation in separate accounts in addition to those listed in the Separate Investment Account Rider. [Compl. ¶ 17]. Plaintiff, for its part, " may send [Defendant] Written Notification indicating you want the contract administered so that assets held under this contract will not participate in one or more of these Separate Accounts." [Separate Investment Account Rider at 2].

The Separate Investment Account Rider describes " Operating Expenses" and " Management Fees." Plaintiff alleges Defendant unilaterally sets its own Management Fee and Operating Expenses in connection with its separate accounts. [Compl. ¶ 28]. The Management Fee under each separate account " will be a percentage of the value of assets in such Separate Account, subject to the equivalent of a maximum annual percentage listed in the Table of Separate Account Features." [Separate Investment Account Rider at 18]. In other words, Defendant maintains the power to unilaterally set the Management Fee for the separate accounts, subject to a maximum fee of 3% (except for one of the separate accounts), and to change the Management Fee at its discretion by giving at least 30 days' written notice. Id. at 18, 27-31; [Compl. ¶ ¶ 20, 28]. The current Management Fees are listed in the contract. [Separate Investment Account Rider at 27-31 (Table of Separate Account Features)]. Management Fee is " the charge consisting of the investment Management Fee and the contract expense charge applicable to this class of contracts for each Separate Account." Id. at 19.

Defendant also charges Operating Expenses against the assets of the separate accounts. Id. at 18. Operating Expenses are " those charges which must be paid in order to operate a Separate Account or obtain investments for a Separate Account."

Page 659

Id. Operating Expenses include, but are not limited to, custodial fees, transfer taxes, brokerage fees, processing fees, and other taxes and fees associated with operating a Separate Account. Id.; [Compl. ¶ 21]. These expenses are also set unilaterally, as there is no formula or other objective measure for how they are calculated. [Compl. ¶ 21]. There is no stated limit on the Operating Expenses. Id. ¶ 28.

For participants in the McCaffree Plan, there are 29 options for separate accounts, and these are also selected by Defendant. Id. ¶ ¶ 24, 18. Each of these separate accounts corresponds with a Principal mutual fund that is otherwise available to retail and institutional investors. Id. ¶ ¶ 25, 2. Each separate account invests solely in shares of the corresponding mutual fund. Id. ¶ 25. Plaintiff alleges there is little or no benefit to participants from " wrapping" a Principal mutual fund with a Principal separate account, and any such benefit is far outweighed by the additional fees this structure allows Defendant to charge. Id. ¶ 26. The fees Defendant charges for the separate accounts are layered on top of the fees charged by the Principal mutual funds in which the separate accounts exclusively invest. Id. ¶ 29. By structuring its investment products in this way, Defendant reaps substantial fees on top of the fees charged by its own mutual funds. Id. ¶ 2. According to Plaintiff, nothing justifies this extra layer of fees, and it significantly reduces the net return to participants. Id. ¶ ¶ 2, 30. No value-added services provided by Defendant in connection with its separate accounts justify what, in Plaintiff's terms, are " exorbitant spreads." Id. ¶ 32. The managers and sub-advisors of the Principal mutual funds in which the Principal separate accounts exclusively invest provide all the day-to-day investment management services for the underlying mutual funds. Id. ¶ 34. They are already well-compensated for these services by the management fees. Id. Wrapping the separate accounts around these mutual funds requires no additional investment management and only minimal additional operating expense. Id. ¶ 35.

The Group Annuity Contract also includes the " Accumulation Group Annuity Endorsement Rider." That rider states in part:

Application for and issuance of this contract constitutes appointment of and acceptance and affirmation by us that (i) we are an " investment manager" as described under the Employee Retirement Income Security Act of 1974 (ERISA) solely with respect to Plan assets held in Separate Accounts under this contract, except for the right reserved in the preceding paragraph and (ii) we are qualified to accept such appointment and acknowledge that by virtue of such appointment we are a fiduciary of the Plan for this purpose, within the meaning of ERISA with respect to our responsibilities as investment manager.

[Def.'s Mot. to Dismiss, Ex. A, Accumulation Group Annuity Endorsement Rider at 6; see also Compl. ¶ 16].

Additionally, Defendant's website states in part:

The Principal® understands the fiduciary responsibilities plan sponsors face in developing and monitoring an investment lineup appropriate to help meet the diverse needs of retirement plan participants. We undertake a rigorous due diligence process as a direct response to this challenge, resulting in a key differentiator--our Sub-Advised Investment Options.

[Pl.'s Br., Ex. A, ECF No. 42-2 (emphasis in original); Compl. ¶ 18]. The term " Sub-Advised Investment Options" includes the Principal separate accounts at

Page 660

issue in this action. [Pl.'s Br., Ex. A; Compl. ¶ 18 & n.3]. Defendant also states that its Sub-Advised Investment Options are " designed to be appropriate for retirement savings under employer-sponsored plans" and that it has " fiduciary oversight and the ability to oversee the investment manager selection and ongoing monitoring process." [Pl.'s Br., Ex. A].

Plaintiff contends Defendant violated ERISA by charging grossly excessive investment management and other fees to the participants in the McCaffree Plan and participants in other defined-contribution retirement plans subject to ERISA. [Compl. ¶ 1]. Plaintiff contends this conduct violates ERISA's duties of loyalty and prudence and involves self-dealing transactions prohibited by ERISA. Id. Plaintiff filed a three-count Class Action Complaint. Count I alleges a Breach of the Duty of Loyalty in violation of ERISA, 29 U.S.C. § 1104(a)(1)(A). Id. ¶ ¶ 52-62. Count II alleges a Breach of the Duty of Prudence in violation of ERISA, 29 U.S.C. § 1104(a)(1)(B). Id. ¶ ¶ 63-70. Count III alleges Prohibited Transactions in violation of ERISA, 29 U.S.C. § 1106(b)(1). Id. ¶ ¶ 71-78. Plaintiff seeks damages and injunctive relief on behalf of both: (1) the participants and beneficiaries of the McCaffree Plan and (2) the participants and beneficiaries of all defined-contribution retirement plans subject to ERISA during the relevant time period who also paid the alleged excessive fees to Defendant. Id. ¶ 3.


A. ERISA Background

ERISA, the Supreme Court has observed, " is a 'comprehensive and reticulated statute,' the product of a decade of congressional study of the Nation's private employee benefit system." Great-West Life & Annuity Ins. Co. v. Knudson, 534 U.S. 204, 209, 122 S.Ct. 708, 151 L.Ed.2d 635 (2002) (quoting Mertens v. Hewitt Assocs., 508 U.S. 248, 251, 113 S.Ct. 2063, 124 L.Ed.2d 161 (1993)). ERISA was " designed to promote the interests of employees and their beneficiaries in employee benefit plans." Shaw v. Delta Air Lines, Inc., 463 U.S. 85, 90, 103 S.Ct. 2890, 77 L.Ed.2d 490 (1983); see Arkansas Blue Cross & Blue Shield v. St. Mary's Hosp., Inc., 947 F.2d 1341, 1343 n.1 (8th Cir. 1991) (" ERISA . . . sets certain uniform standards and requirements for employee benefit plans." ); see also Harris Trust & Sav. Bank v. John Hancock Mut. Life Ins. Co., 302 F.3d 18, 26 (2d Cir. 2002) (" ERISA was enacted in order to protect employee pension and retirement plans." ). ERISA establishes " 'standards of conduct, responsibility, and obligations for fiduciaries.'" Prudential Ins. Co. of Am. v. Nat'l Park Med. Ctr., Inc., 413 F.3d 897, 906-07 (8th Cir. 2005) (quoting Johnston v. Paul Revere Life Ins. Co., 241 F.3d 623, 628 (8th Cir. 2001)); Varity Corp. v. Howe, 516 U.S. 489, 496, 116 S.Ct. 1065, 134 L.Ed.2d 130 (1996) (explaining ERISA sets " forth certain general fiduciary duties applicable to the management of" retirement plans).

B. Fiduciary Status

Plaintiff's claims relate to alleged breaches of fiduciary duties as well as prohibited transactions. Acting as a fiduciary is a requirement for both claims, as is breaching a legal ...

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