Called to the principal's office: How principal would have been held accountable in Mccaffree v. Principal under the new ERISA fiduciary standard.

AuthorSummers, Britni A.

Over forty years ago on Labor Day, the 93rd Congress enacted the Employee Retirement Income Security Act of 1974 ("ERISA"). Prior to ERISA, decades of reform attempts failed to stop misconduct regarding improper management of retirement funds. By implementing a fiduciary standard, ERISA endeavored to regulate those who took advantage of trusting investors and ensure proper management of employee retirement plans. At the time of ERISA's inception, however, 401(k) plans did not exist. As a result, investment advisors in the current retirement market often evade fiduciary status and convince customers to invest in funds that benefit an advisor's self-interests while still operating under ERISA's regulations. On April 8, 2016, the Department of Labor ("DOL") published Final Rule Definition of the Term "Fiduciary"; Conflict of Interest Rule--Retirement Investment Advice ("Final Rule") that broadens ERISA's definition of "fiduciary" in order to meet the demands of the new market. Just three months prior to the Final Rule, in McCaffree v. Principal, the Eighth Circuit ruled that a 401(k) service provider, Principal Life Insurance Company ("Principal"), did not breach a fiduciary duty under the old ERISA definition. This article offers an analysis of McCaffree and whether the DOL's Final Rule would affect the case had it been decided after the Final Rule's issuance.


    On January 8, 2016, the United States Court of Appeals for the Eighth Circuit decided McCaffree Financial Corporation v. Principal Life Insurance Company, (1) which kicked off a year all about the fiduciary. (2) In McCaffree, the Eighth Circuit decided that a third-party service provider, Principal, did not breach a fiduciary duty. (3) Principal escaped liability for charging McCaffree Financial Corporation employees exorbitant fees for investing their retirement savings in Principal mutual funds. (4)

    Just three months after McCaffree, the DOL issued its Final Rule, which would have defined Principal as a fiduciary had the regulation been in effect when McCaffree was decided. (5) Published on April 8, 2016, the DOL's Final Rule redefined who is considered an ERISA fiduciary with respect to retirement plans. (6) The Final Rule broadened the definition of fiduciary to include "advisers, brokers, consultants, and valuation firms [who] play a central role in shaping [retirement] plan... investments." (7) The Final Rule, however, contains a number of exclusions and exemptions. (8) Thus, it is possible that Principal would have still escaped fiduciary status under the Final Rule if it qualified for an exemption or exclusion. (9) This article will demonstrate that the DOL's Final Rule would have made a difference in the outcome of McCaffree and Principal would have been held accountable as a fiduciary (10) This article will also analyze whether, in the future, a plan sponsor will prevail in the Eighth Circuit against a third-party service provider for breaching the fiduciary standard due to excessive fees. (11)



      1. Retirement Savings Terminology

        Learning how to invest and save for retirement can be a daunting task for anyone, but for an ordinary business owner, beginning a 401(k) plan for employees can be a nightmare. (12) Basic terminology must therefore be defined. (13) An employer creates and maintains a retirement plan for its employees and is usually the plan sponsor. (14) A participant is an employee who invests in a plan and is eligible to receive a benefit from a plan. (15) A beneficiary is a person, designated by a participant, who is entitled to benefit from a plan, such as a spouse or child. (16) There are two types of plans: (1) a defined benefit plan, which is a pension plan that assures a participant will receive a specific monthly payment from the plan while in retirement; and (2) a defined contribution plan, such as a 401(k), that does not assure a specific monthly retirement benefit but instead relies on the participant, sometimes with the aid of an employer, to make contributions to an account in a plan. (17) The account contributions are then often invested in the stock market. (18) In a defined contribution plan, the value of a participant's benefit at retirement is commonly based on the amount invested, and how well those investments performed. (19) A third-party service provider is an outside professional, hired by the plan sponsor, to perform operations for the plan including managing plan investments. (20)

        ERISA codified terminology such as "participant" and "beneficiary." (21) Such terminology, however, derives from centuries-old English trust law. (22) Under ERISA, plan sponsors, and sometimes third-party service providers who exercise discretion over a plan or administer a plan, are held to the fiduciary standard. (23) The ERISA fiduciary standard also derives from trust law. (24) Congress chose to weave the fiduciary standard into ERISA because, prior to 1974, some plan administrators mismanaged plan funds or failed to pay plan beneficiaries. (25)

      2. The History of Retirement Savings Leading up to ERISA

        The investments of middle-class Americans comprise an enormous amount of wealth in which financial advisors are eager to manage. (26) Yet, this was not always the case. (27) In the eighteenth and nineteenth centuries, life insurance was the world's largest financial market. (28) In 1900, retirement savings accounts were almost non-existent because the life expectancy rate was only approximately forty-nine years. (29) As life expectancy increased, the likelihood of Americans living longer led to the emergence of the twentieth century's most lucrative economic industry: retirement. (30)

        Prior to 1900, 75% of all males that were lucky enough to reach the age of sixty-five were still working. (31) The first private pension plan in the United States was created in 1875 by the American Express Company. (32) In 1913, the Sixteenth Amendment was enacted and gave Congress the authorization to enact a federal income tax. (33) By 1919, more than 300 private pension plans existed that covered nearly 15% of the nation's workforce. (34) Throughout the 1920s, Congress implemented a number of tax exemptions relating to pension plans. (35)

        In 1935, the life expectancy of the average American increased to about sixty years. (36) Individuals who did reach the age of sixty-five lived, on average, another twelve years. (37) Also in 1935, Social Security set sixty-five as the normal retirement age. (38) By 1940, 15% of all private-sector workers--approximately 4.1 million people--were covered by some form of a pension plan. (39) These plans, like Social Security, were implemented with the belief that benefits would only be paid for a minimal amount of time after a participant's retirement and up to a participant's death. (40)

        The 1940s included attempts to protect lower-wage workers from discrimination in retirement funding with the Revenue Act of 1942, which altered the Internal Revenue Code ("IRC") in a way that discouraged discrimination that benefited higher-paid employees. (41) The IRC also mandated that pension funds be kept in a trust that was managed exclusively in the interest of the participants. (42) Despite reform efforts, mismanagement of pension funds continued. (43)

        By 1950, 25% of all private sector workers--approximately 9.8 million people--were covered by a pension plan. (44) Plan administrators, however, continued to manage pension funds improperly. (45) Congress consequently enacted the Welfare and Pension Plan Disclosure Act ("WPPDA"), which took effect in 1959. (46) The WPPDA mandated that employers deliver plan descriptions and annual updates regarding plan assets. (47) Almost immediately, however, members of Congress began to criticize the effectiveness of WPPDA. (48) In 1961, for example, the Congressional Record shows that some members of government thought of the WPPDA as a "glorified filing system" in which plans "appear in order on their face.... [but in reality, are in] very evident disarray." (49) The WPPDA was amended in 1962 to criminalize certain activities associated with mismanagement of pension plans and extend regulatory functions to an executive administration. (50)

        In 1962, President Kennedy organized the Committee on Corporate Pension Funds ("CCPF") to investigate pension regulations. (51) Meanwhile in 1963, Studebaker Corporation, an automobile plant in South Bend, Indiana, closed its operation. (52) Thousands of Studebaker employees lost their jobs, and because the Studebaker pension plan was underfunded, 6,900 employees lost pension benefits. (53) In 1965, CCPF produced a study revealing government regulation of corporate pension plans needed strengthening. (54) During this time, it also became apparent that the 1962 WPPDA amendments were not effective. (55)

        Over the next decade, Congress reacted to failing pension reforms with extended debate and investigation. (56) By 1970, 45% of all private sector workers--approximately 26.3 million people--were covered by a pension plan. (57) Most of these plans depended on voluntariness of employers to sponsor such a plan. (58) Opponents to pension reform were wary that regulation would push employers to cease sponsoring such plans. (59) Many news outlets, however, broadcasted "pension horror stories" that ignited a public concern for pension reform. (60) Congress proceeded by establishing regulations through a balancing act: regulation would not be so strict that employers would cease offering plans but not so liberal that problems would continue. (61)

        Congress subsequently enacted ERISA in 1974. (62) It "included a blend of minimum standards for pension plan design and operations, specific operational mandates and prohibitions, and general principles of operational conduct." (63) Under ERISA, the fiduciary standard of conduct was applied to those in control of plan administration or plan assets. (64) A...

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