A St. Louis federal appeals court has revived a lawsuit against Principal Life Insurance Co., part of Principal Financial Group, filed by a former 401(k) plan participant who alleged that Principal breached its fiduciary duty in the way it managed a group annuity contract.
The plaintiff, Frederick Rozo, sued Principal in its role as service provider for the WEC Employees 401(k) Profit Sharing Plan, whose sponsor is the Western Exterminator Co. The sponsor wasn't a defendant.
Mr. Rozo sued Principal in November 2014 in U.S. District Court in Des Moines, Iowa, alleging that Principal violated ERISA guidelines when it set guaranteed interest rates every six months for an annuity product called the Principal Fixed Income Option.
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 appeals court ruled unanimously Feb. 3 that Principal was a fiduciary. It reversed the lower court decision and remanded the case "for proceedings consistent with this opinion."
The appeals court focused on the fine print of Principal's agreement with the 401(k) plan as well as on a recent similar case, Teets vs. Great-West Life Annuity Insurance Co. Coincidentally, both the plaintiff and the defendant cited this case in their arguments.
In the Teets case, a participant in a 401(k) plan sued Great-West alleging its setting of rates for a stable value fund violated ERISA. Great-West was the service provider; the plan sponsor wasn't named as a defendant.
A U.S. District Court judge in Denver granted Great-West's petition for summary judgment in December 2017, saying Great-West wasn't a fiduciary. An appeals court in March 2019 upheld the ruling. The U.S. Supreme Court declined to review the case in November 2019.
In the Principal litigation, the appeals court noted there were differences between its decision and the Teets rulings.
Although the latter cited specific contract terms covering Great-West's stable value product, the Principal agreement set "no specific contract terms controlling the (interest) rate," the court wrote. This agreement gave Principal discretion, thus making Principal a fiduciary, the court wrote.
Also, in the Teets case, the sponsor had an "unimpeded ability" to reject Great-West's actions or terminate the contract.
In the Principal case, if the sponsor rejected the rate-setting and wished to cancel the agreement, it would have to pay a 5% surrender charge or have Principal funds remain in the 401(k) plan for 12 months. Both requirements impede termination, thus making Principal a fiduciary because it was "exercising control and authority" over the sponsor, the appeals court wrote.