A lawsuit by a small 401(k) plan against its former record keeper over a $20,703 surrender charge has erupted into a battle between the Department of Labor and retirement industry trade organizations on a complex but crucial ERISA provision known as prohibited transactions.
The DOL supports the plan sponsor, a dental practice in Auburn, Calif., saying that the actions of the ex-record keeper violated ERISA's prohibited transactions standards, which cover an array of regulatory constraints such as improper contracts, transactions that carry a high risk to plan assets, self-dealing by fiduciaries and contracts that transfer to third parties responsibilities reserved for fiduciaries.
The U.S. Chamber of Commerce and the American Council of Life Insurers support the record keeper, saying it didn't violate ERISA's rules.
Industry groups say the DOL's interpretation of ERISA's prohibited transactions rules would unleash more lawsuits and impair the relationship between plan sponsors and service providers. The DOL says its approach affords greater protection to sponsors against transactions that may not be in the best interest of participants.
The clash was triggered by the D.L. Markham dental practice suing the Variable Annuity Life Insurance Co. and two VALIC subsidiaries in January 2021, claiming a violation of the prohibited transactions rules and ERISA's rules against self-dealing.
The dental practice and its 401(k) plan said the fees were too high given the "insufficient" quality of services and investment returns. When the dental practice transferred its retirement plan to another service provider, the defendants deducted the surrender charge from the plan assets.
A U.S. District Court in Houston dismissed the complaint in October 2022. (The three VALIC units are now subsidiaries of Corebridge Financial, which was spun off as a separate company last year by American International Group Inc., the former VALIC parent.)
The plaintiffs appealed to the 5th U.S. Circuit Court of Appeals in New Orleans, prompting an amicus brief by the DOL in February and, in April, amicus briefs supporting VALIC by the Chamber of Commerce and the American Council of Life Insurers.
The DOL rarely files an amicus brief in cases below the Supreme Court level.