Court Finds Principal not a Fiduciary in 401(k) Rollover Case

In a memorandum to clients, The Groom Law Group said that in Walsh v. Principal Life Ins. Co., the U.S. District Court for the Southern District of Iowa rejected many of the arguments that the plaintiff made in support of her claims that Principal Life and its affiliate, Princor Financial Services Corporation, were acting as Employee Retirement Income Security Act (ERISA) fiduciaries in communicating with plan participants about the rollover of their plan account balances into Principal Individual Retirement Accounts (IRAs).The court held that for the case to proceed as a class action, the plaintiff had to make a prima facie showing that the issue of whether Principal qualified as an ERISA fiduciary could be resolved on a class-wide basis.

The court rejected plaintiff’s argument that Principal became a fiduciary when it sent letters to terminated participants asking them to contact a Principal representative to discuss their account balance because the letters were sent for Principal’s own purposes, not for plan purposes. The court said the argument was contradictory because a person is not a fiduciary unless the action at issue amounts to management or administration of the plan. The court also noted that a third party service provider is not a fiduciary to the extent that it acts as a salesperson and does not provide investment advice or act as an agent for the plan administrator, the memo said. 

The court also rejected plaintiff’s argument that Principal was a fiduciary because, in sending the letters, it acted outside the framework of administrative policies established by the plan. The court said the fact that an action is taken outside the framework of plan policies is not alone enough to qualify a person as a fiduciary—the action itself must constitute an exercise of discretionary authority or control over plan management or administration. 

According to Groom, the court concluded that evidence that a service provider sent a notice to certain plan participants alerting them to a change in their status is not in and of itself sufficient to establish that the service provider undertook a discretionary act related to plan management, but the plaintiff also would need to show that the substance of the subsequent phone communications between Principal and participants addressed future benefits under the plan, which the court concluded would require individualized inquiries inappropriate for resolution on a class basis. 

In addition, the court said that even if the letters were sent to participants on behalf of a plan, the court would need to make an individualized inquiry into whether Principal’s actions were ministerial (and not fiduciary) because at least some employers may have contractually agreed in their service agreement that Principal should send the letters to the participants. The court also found that the fact that Principal had access to and used plan confidential information for its mailings did not support a conclusion that Principal acted as a fiduciary even if it allegedly used the information for its own benefit. 

The court rejected plaintiff’s argument that Principal could be a fiduciary because it exercised “control” over the disposition of plan assets by inducing the participants to rollover their plan account balances, saying that for Principal to qualify as a fiduciary, the plaintiff would need to establish that Principal, not the participant, controlled the decision to rollover the funds.  

Finally, the plaintiff said Principal was a fiduciary because, in communicating with participants, it provided investment advice within the meaning of ERISA. The court concluded that, under Department of Labor regulations, fiduciary status turns, in part, on whether the advice was regularly provided and whether there was a meeting of the minds that the participant would use the investment advice as a primary basis for making investment decisions, and these questions could not be answered without looking at the individual interactions between Principal and the participants; thereby precluding the possibility that the case could proceed as a class action. 

The court also found that reliance and loss causation could not be established on a class-wide basis since whether a participant relied on Principal’s sales efforts depended on the individual interactions between the participants and Principal. The court noted that recordings of several phone calls between participants and Principal showed that the substance of the conversations varied extensively and that some participants placed minimal importance on the information provided by Principal. 

The court also noted that Principal submitted evidence that the rollover rate from plans into Principal IRAs was approximately the same as the rollover rate industry-wide for 401(k) plans, which the court said “carrie[d] some weight in rebutting [the] presumption of causation,” according to the Groom memo. 

The plaintiff alleged that she suffered losses because the Principal proprietary investment products in which she subsequently invested through her IRA charged higher fees. The plaintiff sought to have the court certify a plaintiff class consisting of participants in retirement plans nationwide for which Principal provided retirement services who responded to the letters that Principal sent and, between October 31, 2001, and October 31, 2007, established an IRA with Principal that included Principal affiliated investment products.