Compliance February 5, 2020

Principal GIC Lawsuit Revived by Appellate Court

The original lawsuit accuses Principal Financial Group of violating ERISA by setting the crediting rate for a guaranteed investment contract (GIC) such that it can “retain unreasonably large and/or excessive profits.”

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A federal appellate court has revived a lawsuit accusing Principal Financial Group of violating the Employee Retirement Income Security Act (ERISA) by setting the crediting rate for a guaranteed investment contract (GIC) such that it can “retain unreasonably large and/or excessive profits.”

The 8th U.S. Circuit Court of Appeals reversed a lower court’s decision that Principal is not a fiduciary when it sets the composite crediting rate (CCR) for the GIC, and it is also not a party-in-interest engaging in prohibited transactions. The appellate court says outright, “Principal is a fiduciary when it sets the CCR.”

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The court relies on a 10th U.S. Circuit Court of Appeals decision in Teets v. Great-West Life & Annuity Ins. Co., which the 8th Circuit says all parties agree is the decision that should guide the appeal. According to the opinion, Teets determines that a service provider acts as a fiduciary if it (1) “did not merely follow a specific contractual term set in an arm’s-length negotiation,” and (2) “took a unilateral action respecting plan management or assets without the plan or its participants having an opportunity to reject its decision.” In other words, if the provider’s actions (1) conform to specific contract terms or (2) a plan and participant can freely reject it, then the provider is not acting with “authority” or “control” respecting the “disposition of [the plan’s] assets,” per ERISA’s definition of a fiduciary.

For the Principal Fixed Income Option, Principal unilaterally calculates the CCR every six months. Before the CCR takes effect—typically a month in advance—Principal notifies plan sponsors, which alert the participants. If a plan sponsor wants to reject the proposed CCR, it must withdraw its funds, facing two options: (1) pay a surrender charge of 5% or (2) give notice and wait 12 months. If a plan participant wishes to exit, he or she faces an “equity wash.” They can immediately withdraw their funds, but not reinvest in contracts such as the Principal Fixed Income Option for three months.

The 8th Circuit found that Principal’s setting of the CCR does not conform to a specific term of its contract with the plan sponsors. Every six months, Principal sets the CCR with no specific contract terms controlling the rate. Principal calculates the CCR based on past rates in combination with a new rate that it unilaterally inputs.

Citing Teets, the appellate court also found the plan sponsors do not “have the unimpeded ability to reject the service provider’s action or terminate the relationship.” The opinion states, “Charging a 5% fee on a plan’s assets impedes termination. Likewise, holding a plan’s funds for 12 months after it wishes to exit impedes termination.”

Principal argues that the surrender penalty and delay are not impediments because they are in the plan contract, but the appellate court says this argument is misplaced. “Fiduciary status focuses on the act subject to complaint. … Here, Rozo complains about the setting of the CCR. Because plan sponsors do not have an opportunity to agree to the CCR until after it is proposed, the CCR is a new contract term. This court, therefore, must decide if plan sponsors can freely reject the term. … It does not matter that the barriers to rejecting the CCR are in the contract,” the opinion says.

The appellate court also rejected Principal’s argument that a participant’s ability to freely reject the CCR—regardless of the plan sponsor’s ability—negates fiduciary status for the service provider, saying Teets summarizes ERISA case law as finding fiduciary status if either a plan sponsor or a participant is impeded from rejecting the service provider’s act.

Compliance February 4, 2020

Plaintiffs Clear Summary Judgement in CBIZ Litigation

A federal court has ruled that the University of Pittsburgh Medical Center’s lawsuit against CBIZ should not be dismissed as a matter of summary judgment.

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The U.S. District Court for the Western District of Pennsylvania has ruled in the case of UPMC v. CBIZ, determining that the lawsuit should not be dismissed as a matter of summary judgement.

The plaintiffs in the case are UPMC, also known as the University of Pittsburgh Medical Center, as well as a subsidiary operating in the central part of the state known as UPMC Altoona. UPMC operates health care facilities in and around Pittsburgh; the organization is also the parent and supporting organization for numerous other nonprofit health care providers, each existing as a separate and distinct corporate entity. Plaintiff UPMC Altoona is one such subsidiary of UPMC, case documents show, having been acquired in July 2013.

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At the core of this litigation are allegations that the defendants—including some named individuals as well as CBIZ Inc. and CBIZ Benefits and Insurance Services Inc.—made critical actuarial errors while conducting certain analyses for UPMC. According to plaintiffs, the errors allegedly cost UPMC more than $100 million dollars in unanticipated pension obligations after the UPMC Altoona acquisition.

According to the plaintiffs, CBIZ was paid substantial fees to perform substantial amounts of actuarial work for UPMC.

“Yet during the course of this engagement, from at least July 1, 2008, through February 2015, defendants failed to adhere to actuarial standards of practice and consequently materially erred in valuing the obligations and liabilities of Altoona’s pension benefit plans for funding, compliance and accounting purposes,” the lawsuit states. “Defendants’ multiple errors caused the Altoona plans’ projected benefit obligation (PBO) to be falsely stated on Altoona’s balance sheet at $240 million. In fact, Altoona’s PBO was then $373 million. Defendants had understated the liability by approximately $132.5 million.”

As noted in the ruling, the defendants moved for summary judgment on the plaintiffs’ malpractice and lost opportunity claims. They asserted that these claims fail because “(1) they are too speculative; (2) Altoona had sufficient funds to meet its increased funding obligation; (3) UPMC Altoona suffered no damages as a result of defendants’ calculations; and (4) the claims are pre-empted by the Employee Retirement Income Security Act [ERISA].”

On the first matter, the court notes that under Pennsylvania law, a plaintiff cannot recover damages that are “too speculative, vague or contingent.” Additionally, a plaintiff cannot recover damages beyond those which can be established with “reasonable certainty.” Some speculation regarding damages is permissible, as evidence of damages may consist of probabilities and inferences and need not be “completely free of all elements of speculation” or proved with “mathematical certainty.”

“Here, plaintiffs have shown that the damages they claim are not speculative and that they can establish them with reasonable certainty,” the ruling states. “Plaintiffs claim that defendants’ errors in reporting its true pension liabilities harmed them because the errors prevented Altoona from seeking and obtaining [available pension funding] relief, which caused plaintiffs to pay off liabilities they could have avoided.”

Moving on the second issue, the District Court holds that numerous factual disputes about Altoona’s financial situation preclude summary judgment on these grounds.

“For example, defendants say that Altoona could have made additional budget cuts to fund its pensions; plaintiffs say this was not feasible,” the ruling states.

The third and fourth claims are similarly allowed to proceed.

“ERISA does not pre-empt professional malpractice actions brought by a plan sponsor because such actions are unlikely to interfere with plan administration and do not implicate the funding, benefits, reporting or administration of an ERISA plan,” the ruling states. “However, ERISA pre-empts malpractice claims brought by plan beneficiaries because ERISA itself contains a civil enforcement scheme for plan beneficiaries. Here, ERISA does not pre-empt plaintiffs’ malpractice and lost opportunity claims because they do not relate to the administration of an ERISA benefit plan. The mere fact that an ERISA plan is a part of plaintiffs’ claim is not enough to trigger ERISA pre-emption.”

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