We’re still talking here at FactRight about Professor Mercer Bullard’s presentation about the DOL Fiduciary Rule at our due diligence conference a couple weeks ago. Professor Bullard thoughtfully explored what provisions of the impartial conduct standards broker dealers ought to pay particular attention to, and over which ones fears are overblown.
But fiduciary classification has consequences in addition to what broker dealers must do to comply with impartial conduct standards and instructions regarding best interest contracts. ERISA case law helps to provide the contours of what else it means to be a fiduciary, and broker dealers should be aware of how that body of law, much older than the Fiduciary Rule and developed in different contexts, may directly or even analogously apply to them.
In a prior post, we covered the Supreme Court’s holding on how ERISA and common law regarding fiduciary duty requires retirement plan fiduciaries to perform ongoing due diligence on individual plan options made available to beneficiaries. Other relatively recent litigation (which was settled in 2016) sheds light on how the number of investment options provided to plan investors intersects with fiduciary liability.
In November 2012, in Krueger v. Ameriprise Financial, Inc. the U.S. District Court of Minnesota denied Ameriprise Financial’s motion to dismiss retirement plan participants’ claims alleging, among other things, that Ameriprise and its subsidiaries breached their fiduciary duties of loyalty and prudence to plan participants under ERISA.
In denying the motion to dismiss, the court found that plan participant allegations stated a plausible claim for relief. To be clear, the denial of the motion was not a final ruling against Ameriprise based on the merits of the case. But survival of the claims upon a motion to dismiss tells us about what fact patterns the Court believes will demonstrate breach of fiduciary duties (among other things) in these contexts. Before final resolution on the merits, the parties entered into a $27.5 million settlement agreement in March 2016, which the court approved. But the court’s 2012 motion to dismiss opinion provides valuable analysis on the fiduciary standard under ERISA, which should be of interests to newly minted fiduciaries.
In 2005, after it spun off from American Express, Ameriprise became the 401(k) retirement plan sponsor for its employees and retirees. In this role, Ameriprise and its affiliates administered the retirement plan and monitored investment options. The retirement plan allowed participants to invest in Ameriprise-affiliated and non-affiliated investments. In 2011, plan participants sued Ameriprise and its affiliates who oversaw the retirement plan, alleging that the plan invested hundreds of millions of dollars in funds managed by Ameriprise affiliates primarily because they generated profits for Ameriprise and its affiliates.
ERISA imposes two duties on fiduciaries:
- Duty of loyalty to act in the best interest of the plan investor, and
- Duty to prudently select investment options
The duty of loyalty requires that plan fiduciaries act for the exclusive purpose of providing benefits to the beneficiary. In order to satisfy this duty, the fiduciary is required to act with “complete loyalty to the interests of the beneficiary” at the expense of their own self-interest or the interests of third parties.
Fiduciaries also have a duty of prudence. This means that fiduciaries must act “with the care, skill, prudence, and diligence” that a prudent individual would act with under similar circumstances.
The Court’s view of fiduciary claims
It’s certainly not surprising that the court found viable the plaintiffs’ allegations regarding Ameriprise’s purported attempts to generate fees for itself and affiliates through investment in proprietary funds. Among other things, plan participants argued that Ameriprise and its affiliates breached their fiduciary duties and/or undertook prohibited transactions by (i) directing plan assets to newly created affiliated funds, which made these funds more marketable to outside investors, (ii) investing in affiliated mutual funds that were subject to two layers of fees, and (iii) selecting more expensive share classes even though they provided no additional benefit to plan participants that share classes with lower fees. The court also stated that, if the allegations were true, Ameriprise’s investment selection process “may have been tainted by failure of effort, competence, or loyalty.”
More interesting to note is the court’s holding related to Ameriprise’s contention that it did not breach its fiduciary duties, because that the plan offered many non-affiliated investment options at market prices. The court rejected this argument, citing three federal circuit court decisions, each of which had previously found that the inclusion of prudent investments alongside imprudent investments does not satisfy the fiduciary duty and that fiduciaries may not offer imprudent investments to participants. For example, in 2012, the 6th Circuit Court in Pfeil v. State Street Bank & Trust Co. (671 F.3d 585) held the following:
A fiduciary cannot avoid liability for offering imprudent investments merely by including them alongside a larger menu of prudent investments. Much as one bad apple spoils the bunch, the fiduciary’s designation of a single imprudent investment offered as part of an otherwise prudent menu of investment choices amounts to a breach of fiduciary duty, both the duty to act as a prudent person would in a similar situation with single-minded devotion to the plan participants and beneficiaries, as well as the duty to act for the exclusive purpose of providing benefits to plan participants and beneficiaries.
Lessons for broker dealers
The main issues alleged here related to putting proprietary products ahead of the clients’ best interests. But one of the more important takeaways from Krueger is that a plethora of good retirement investment options does not mitigate the liability created by imprudently selected ones. And it’s yet to be seen how far courts will apply the logic of this and similar cases to investment platforms at large (whether or not offered in the retirement context) once a uniform fiduciary standard becomes reality. But of course it is within the realm of conceivability (which is often all the plaintiff bar needs) that the larger a broker dealer’s investment platform gets, the higher the likelihood some choices were not selected according to the best interests of clients. The fiduciary dimension creates further underscores the perennial importance of intelligent platform design, and prudent initial and ongoing due diligence.
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