A federal appeals court in St. Louis has ruled in favor of Principal Life Insurance Co. in a lawsuit filed by a participant in a 401(k) plan alleging ERISA violations in the company's management of a group annuity contract.
The Sept. 2 ruling by a three-judge panel of the 8th U.S. Circuit Court of Appeals was the latest in a series of decisions since the plaintiff filed a complaint in 2014 in the case of Frederick Rozo vs. Principal Life Insurance Co. The original complaint, seeking class-action status, was filed in a U.S. District Court in Des Moines, Iowa.
As a participant in the 401(k) plan of Western Exterminator Co., Mr. Rozo alleged that Principal — as service provider for the retirement plan — set the interest rates too low for a stable value product called the Principal Fixed Income Option and engaged in self-dealing. The sponsor isn't a defendant.
In September 2018, U.S. District Judge John A. Jarvey granted Principal's motion for summary judgment, writing that the company is not an ERISA fiduciary when setting interest rates for the annuity and not a fiduciary for setting terms for the 401(k) plan to continue or terminate the contract.
However, a three-judge panel for the 8th Circuit reversed and remanded the ruling in February 2020, saying Principal was a fiduciary.
Principal petitioned the U.S. Supreme Court for a review in June 2020, but the court declined to hear the case in October 2020. The complaint went back to Mr. Jarvey, who conducted a six-day trial.
In April 2021, Mr. Jarvey again supported Principal. "The court finds that the product at issue in this case was offered at a competitive interest rate," the judge wrote. "The interest rate was derived using sound actuarial principles. In fact, no actuary questioned the application of these principles and no criticism was done on an actuarial basis."
Mr. Rozo appealed again, but this time the appeals court agreed with the District Court and ruled for Principal.
The judges rejected the plaintiff's claim that Principal violated ERISA's duty of loyalty – a guideline that deals with self-dealing. They also rejected the plaintiff's argument that Principal's compensation was unreasonable.
The lower court's pro-Principal ruling about compensation was "supported by witness testimony it deemed reasonable," the judges wrote. "We hold that Principal has met its burden of establishing that its compensation was reasonable."
