A federal appeals court rejected a 401(k) plan's dispute with a record keeper in an ERISA case that attracted dueling presentations by the Department of Labor and retirement industry trade organizations.
The dispute in D.L. Markham Inc. 401(k) Plan et al. vs. Variable Annuity Life Insurance Co. et al. involved a $20,703 surrender fee that the 401(k) plan argued had violated ERISA's prohibited transactions guidelines. The appeals court issued its opinion Dec. 14.
The clashing comments were filed as amicus briefs by the Labor Department, supporting the 401(k) plan, and by the U.S. Chamber of Commerce and American Council of Life Insurers, supporting VALIC. They argued that the small plan's dispute could have outsized consequences depending of the appeals court's decision.
The industry groups contended that a pro-plaintiff ruling would subject sponsors to more lawsuits and damage the relationship between sponsors and service providers. The DOL maintained that a pro-plaintiff decision would give sponsors greater protection against transactions that might not be in the best interest of participants.
The 5th U.S. Circuit Court of Appeals, New Orleans, ruled in favor of the defendants, upholding an October 2022 dismissal of the complaint by a U.S. District Court judge in Houston.
The D.L. Markham dental practice, Auburn, Calif. sued the VALIC defendants in January 2021, complaining that VALIC's fees were excessive while services and returns were "insufficient." (The case was later moved to a U.S. District Court in Houston from a U.S. District Court in California.)
When the dental practice transferred its retirement plan to another service provider, VALIC deducted the surrender charge from plan assets. The dental practice argued that the surrender charge represented a prohibited transaction and self-dealing in violation of ERISA.
(The VALIC defendants are now subsidiaries of Corebridge Financial, which was spun off as a separate company in 2022 by American International Group, the former parent of VALIC.)
"Our sister circuits that have considered this issue have held that accepting predetermined compensation does not constitute a fiduciary act," the three-judge panel wrote Dec. 14. "We agree with these holdings."
The judges wrote that "accepting predetermined compensation that was agreed to by a plan's named fiduciary does not constitute control over the management of a plan or disposition of the plan's assets."
The defendants had signed a contract with the sponsor. Even though VALIC could have waived the surrender charge, VALIC had the right to retain it, the judges wrote. "VALIC merely adhered to the contract by collecting the previously bargained-for compensation," they wrote.
The DOL's amicus brief said the ERISA term "a person providing services to such plan" covers all service providers "regardless of whether they have begun providing service to the particular plan at issue," the appeals court wrote.
"This interpretation contradicts the plain reading of the text," the judges wrote, referring to ERISA rules. "Entities that are not already providing services to a particular plan at the time of contracting that plan, such as VALIC with respect to the Markham plan," do not violate ERISA's prohibited transaction guidelines.
