McCaffree Financial Corp. v. Principal Life Insurace Co.

Filing

OPINION FILED - THE COURT: William Jay Riley, Kermit E. Bye and Raymond W. Gruender AUTHORING JUDGE:Raymond W. Gruender (PUBLISHED) [4354016] [15-1007]

United States Court of Appeals
For the Eighth Circuit
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No. 15-1007
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McCaffree Financial Corp., on behalf of a class of those similarly situated, on
behalf of The McCaffree Financial Corp. Employee Retirement Program
lllllllllllllllllllll Plaintiff - Appellant
v.
Principal Life Insurance Company
lllllllllllllllllllll Defendant - Appellee
-----------------------------Thomas E. Perez
United States Secretary of Labor
lllllllllllllllllllllAmicus on Behalf of Appellant(s)
American Council of Life Insurers
lllllllllllllllllllllAmicus on Behalf of Appellee(s)
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Appeal from United States District Court
for the Southern District of Iowa - Des Moines
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Submitted: September 21, 2015
Filed: January 8, 2016
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Before RILEY, Chief Judge, BYE and GRUENDER, Circuit Judges.
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GRUENDER, Circuit Judge.
McCaffree Financial Corp. (“McCaffree”) sponsors for its employees a
retirement plan governed by the Employee Retirement Income Security Act of 1974
(“ERISA”), 29 U.S.C. §§ 1001-1461. McCaffree brought a class action lawsuit on
behalf of those participating employees against Principal Financial Group
(“Principal”), the company with whom McCaffree had contracted to provide the
plan’s investment options. McCaffree alleged that Principal had charged McCaffree’s
employees excessive fees in breach of a fiduciary duty Principal owed to plan
participants under ERISA. The district court1 granted Principal’s motion to dismiss
for failure to state a claim. We affirm.
I.
McCaffree and Principal entered into a contract on September 1, 2009.
Pursuant to this contract, Principal agreed to offer investment options and associated
services to McCaffree employees participating in the McCaffree retirement plan. The
contract, which we consider as an “exhibit[] attached to the complaint whose
authenticity is unquestioned,” Miller v. Redwood Toxicology Lab., Inc., 688 F.3d 928,
931 n.3 (8th Cir. 2012), provided plan participants with a number of investment
options. First, participants could maintain retirement contributions in a “general
investment account” offering guaranteed interest rates. Alternatively, participants
could allocate those contributions among various “separate accounts,” which
Principal had created to serve as vehicles for retirement-plan customers to invest in
1

The Honorable Stephanie M. Rose, United States District Judge for the
Southern District of Iowa.
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Principal mutual funds. Principal assigned each separate account to a different
Principal mutual fund, meaning that contributions to a separate account would be
invested in shares of the associated mutual fund. Principal reserved the right to limit
which separate accounts (and therefore which mutual funds) it would make available
to plan participants. In addition, McCaffree also maintained the ability to limit, via
written notice to Principal, the accounts in which its employees could invest.
Pursuant to these provisions, the full list of sixty-three accounts included in the plan
contract was narrowed down to twenty-nine separate accounts (and associated
Principal mutual funds) eventually made available to plan participants.
The contract provided that, in return for Principal providing access to these
separate accounts, participants would pay to Principal both management fees and
operating expenses. Principal assessed the management fees as a percentage of the
assets invested in a separate account, and this percentage varied for each account
according to its associated mutual fund. In addition, Principal could unilaterally
adjust the management fee for any account, subject to a cap (generally 3 percent)
specified in the contract. The contract required Principal to provide participants at
least thirty days’ written notice of any such change. The operating expenses
provision did not place a limit on the amount that Principal could charge for such
expenses, but it restricted Principal to passing through only those expenses necessary
to maintain the separate account, such as various taxes and fees Principal paid to third
parties. Principal assessed both the management fee and operating expenses in
addition to any fees charged by the mutual fund assigned to each separate account.
Five years after entering into this contract, McCaffree filed this class action
lawsuit on behalf of all employees participating in the McCaffree plan. The
complaint alleged that Principal charged participants who invested in the separate
accounts “grossly excessive investment management and other fees” in violation of
Principal’s fiduciary duties of loyalty and prudence under sections 404(a)(1)(A) and
(B) of ERISA, 29 U.S.C. §§ 1104(a)(1)(A), (B). McCaffree claimed that the separate
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accounts served no purpose other than to invest in shares of various Principal mutual
funds and therefore involved minimal additional expense for Principal. Because each
Principal mutual fund charged its own layer of fees, McCaffree alleged, the additional
separate account fees were unnecessary and excessive. McCaffree’s suit sought to
recover for plan participants these separate account fees as well as the diminution of
investment returns that had occurred as a result of the fees.
Principal moved to dismiss the complaint under Federal Rule of Civil
Procedure 12(b)(6). Principal argued that McCaffree had failed to state a claim under
ERISA because McCaffree had agreed to the disputed charges explicitly in its
contract with Principal and because Principal was not a fiduciary at the time the
parties agreed upon the allegedly excessive fees. The district court granted this
motion, holding that Principal was not acting as a fiduciary at the time the fees and
expenses were negotiated, and that any subsequent fiduciary duty Principal owed
lacked a sufficient nexus with McCaffree’s excessive fee allegations. McCaffree now
appeals.
II.
We review de novo a district court’s dismissal for failure to state a claim,
taking all facts alleged in the complaint as true. Trooien v. Mansour, 608 F.3d 1020,
1026 (8th Cir. 2010). Rule 12(b)(6) allows a defendant to move for dismissal based
on a plaintiff’s “failure to state a claim upon which relief can be granted.” Fed. R.
Civ. P. 12(b)(6). To survive a motion to dismiss under Rule 12(b)(6), “a complaint
must contain sufficient factual matter, accepted as true, to ‘state a claim to relief that
is plausible on its face.’” Braden v. Wal-Mart Stores, Inc., 588 F.3d 585, 594 (8th
Cir. 2009) (quoting Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009)). A claim is plausible
on its face “when the plaintiff pleads factual content that allows the court to draw the
reasonable inference that the defendant is liable for the misconduct alleged.” Iqbal,

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556 U.S. at 678. In making this determination, we must draw all reasonable
inferences in favor of plaintiffs. Crooks v. Lynch, 557 F.3d 846, 848 (8th Cir. 2009).
In order to state a claim that a service provider to an ERISA-governed plan
breached a fiduciary duty by charging plan participants excessive fees, a plaintiff first
must plead facts demonstrating that the provider owed a fiduciary duty to those
participants. Mertens v. Hewitt Assocs., 508 U.S. 248, 251, 253 (1993) (confirming
that the “detailed duties and responsibilities” imposed by ERISA are “limited by their
terms to fiduciaries”). According to ERISA, a party not specifically named as a
fiduciary of a plan owes a fiduciary duty only “to the extent” that party (i) exercises
any discretionary authority or control over management of the plan or its assets; (ii)
offers “investment advice for a fee” to plan members; or (iii) has “discretionary
authority” over plan “administration.” 29 U.S.C. § 1002(21)(A). The phrase “to the
extent” at the beginning of this provision demonstrates that fiduciary status under
ERISA “is not an all-or-nothing concept.” Trs. of the Graphic Commc’ns Int’l Union
Upper Mw. Local 1M Health & Welfare Plan v. Bjorkedal, 516 F.3d 719, 732 (8th
Cir. 2008) (quoting Darcangelo v. Verizon Commc’ns, Inc., 292 F.3d 181, 192 (4th
Cir. 2002)). Therefore, courts assessing claims under ERISA must ask “whether [a]
person was acting as a fiduciary . . . when taking the action subject to complaint.”
Pegram v. Herdrich, 530 U.S. 211, 226 (2000) (emphasis added). In a recent case
involving excessive fee claims similar to those asserted here, the Third Circuit aptly
described this provision as requiring a “nexus” between the alleged basis for fiduciary
responsibility and the wrongdoing alleged in the complaint. Santomenno ex rel. John
Hancock Tr. v. John Hancock Life Ins. Co., 768 F.3d 284, 296 (3d Cir. 2014).
Because Principal is not a named fiduciary of the plan, McCaffree needed to
plead facts demonstrating that Principal acted as a fiduciary “when taking the action
subject to complaint.” See Pegram, 530 U.S. at 211. McCaffree makes five
arguments in support of its claim that Principal breached a fiduciary duty to charge
reasonable fees. None of these arguments, however, demonstrates that McCaffree
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stated a valid claim under ERISA. The first fails because Principal owed no duty to
plan participants during its arms-length negotiations with McCaffree, and the
remaining four fail because McCaffree did not plead a connection between any
fiduciary duty Principal may have owed and the excessive fees Principal allegedly
charged.
First, McCaffree argues that Principal’s selection of the sixty-three separate
accounts in the initial investment menu constituted both an exercise of discretionary
authority over plan management under 29 U.S.C. § 1002(21)(A)(i) and plan
administration under (A)(iii). As a result, McCaffree contends, Principal owed a duty
to ensure that the fees associated with those accounts were reasonable. However, this
argument overlooks the fact that the contract between McCaffree and Principal
clearly identified each separate account’s management fee and authorized Principal
to pass through additional operating expenses to participants in these accounts.
Several of our sister circuits have held that a service provider’s adherence to its
agreement with a plan administrator does not implicate any fiduciary duty where the
parties negotiated and agreed to the terms of that agreement in an arm’s-length
bargaining process. See Hecker v. Deere & Co., 556 F.3d 575, 583 (7th Cir. 2009);
Renfro v. Unisys Corp., 671 F.3d 314, 324 (3d Cir. 2011). We agree. Up until it
signed the agreement with Principal, McCaffree remained free to reject its terms and
contract with an alternative service provider offering more attractive pricing or
superior investment products. Under such circumstances, Principal could not have
maintained or exercised any “authority” over the plan and thus could not have owed
a fiduciary duty under ERISA. Because Principal did not owe plan participants a
fiduciary duty while negotiating the fee terms with McCaffree, Principal could not
have breached any such duty merely by charging the fees described in the contract
that resulted from that bargaining process.
Second, McCaffree contends that Principal acted as a fiduciary when it selected
from the sixty-three accounts included in the contract the twenty-nine it ultimately
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made available to plan participants. McCaffree contends that this winnowing
process, which took place after the parties entered into the contract, gave rise to a
fiduciary duty obligating Principal to ensure that the fees associated with those
twenty-nine accounts were reasonable. While the parties dispute whether McCaffree
adequately pled that Principal, rather than McCaffree, chose the final twenty-nine
accounts, we need not decide this issue. Even if McCaffree did so allege, McCaffree
failed to plead a connection between the act of winnowing down the available
accounts and the excessive fee allegations. At no point does McCaffree assert that
only some of the sixty-three accounts in the contract had excessive fees, or that
Principal used its post-contractual account selection authority to ensure that plan
participants had access only to the higher-fee accounts. Instead, McCaffree’s
complaint categorically challenges the management fees and operating expenses
associated with all of the separate accounts included in the contract, claiming that
Principal lacked a legitimate basis for charging these fees for any separate account.
Because Principal’s alleged selection of the twenty-nine accounts is not “the action
subject to complaint,” Pegram, 530 U.S. at 226, McCaffree cannot base its excessive
fee claims on any fiduciary duty Principal may have owed while choosing those
accounts.2

2

In any event, two facts evident from the contract attached to the complaint
foreclose McCaffree’s argument that Principal’s selection of the twenty-nine accounts
resulted in plan participants paying higher fees. First, the contract empowered
McCaffree to reject any fund Principal selected for the plan. Second, our review of
the fees reflected in the contract for the twenty-nine selected accounts shows that the
average management fee associated with those accounts was just one tenth of one
percent higher than the average fee of all sixty-three accounts identified in the
contract. McCaffree cannot plausibly claim that this small discrepancy demonstrates
that Principal violated any fiduciary duty in selecting the twenty-nine accounts,
particularly where participants freely allocated their contributions among the various
accounts available.
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Third, McCaffree argues that Principal’s discretion to increase the separate
account management fees and to adjust the amounts charged to participants as
operating expenses supports its claim that Principal was a fiduciary. However,
McCaffree again has failed to plead any connection between this discretion and the
complaint’s excessive fee allegations. McCaffree points to Principal’s authority to
raise the management fees (subject to a cap), but McCaffree does not allege that
Principal exercised this authority or that any such exercise resulted in the allegedly
excessive fees. The complaint only challenges the management fees as provided for
by the contract. Similarly, McCaffree contends that Principal’s discretion in passing
through operating expenses to plan participants implicated a fiduciary duty to ensure
those charges were reasonable. McCaffree’s complaint, however, is devoid of any
allegation that Principal abused this discretion by passing through fees in excess of
the expenses that it actually incurred and that the contract authorized it to pass on to
plan participants.3 McCaffree attempts to compensate for this shortcoming by
explaining that its complaint challenged the total fees associated with the separate
accounts, without regard to whether Principal classified the charges as operating
expenses or management fees. Any such classification is immaterial, McCaffree
contends, because Principal lacked a justification to charge participants in the
separate accounts any additional fees. That line of reasoning only further undermines

3

McCaffree contends that section 1002(21)(A)(iii) creates a fiduciary duty
even where a service provider does not exercise its administrative authority. This
argument is in line with our holding in Olson v. E.F. Hutton & Co., Inc., in which we
explained that subsection (A)(iii) “describes those individuals who have actually been
granted discretionary authority, regardless of whether such authority is ever
exercised.” 957 F.2d 622, 625 (8th Cir. 1992). This principle, however, does not
rescue McCaffree’s challenge to the operating expense charges. The contract does
not give Principal any “authority” to pass through unreasonable or fabricated
expenses. It authorizes only those expenses which “must be paid” to operate the
accounts. The possibility that Principal might breach this provision and pass through
unauthorized expenses does not represent any “authority” of the kind that might
establish a fiduciary duty under subsection (A)(iii).
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McCaffree’s claim, as it demonstrates once again that McCaffree seeks to evade
through this lawsuit precisely those fees to which the parties contractually agreed.
Fourth, McCaffree alleges that Principal provided participants with
“investment advice,” giving rise to a fiduciary duty under subsection (A)(ii).
However, McCaffree failed to allege facts establishing a nexus between the separate
account fees and any investment advice Principal may have provided. Although
Principal does act as the investment manager for the mutual funds available through
the separate accounts, Principal’s management of those funds is not “the action
subject to complaint,” Pegram, 530 U.S. at 226. To the contrary, McCaffree claims
that every investment option included in the plan charged excessive fees. Because
a service provider’s fiduciary status under ERISA “is not an all-or-nothing concept,”
Bjorkedal, 516 F.3d at 732, McCaffree cannot support its allegations that the fees in
the plan contract are excessive by pointing to an unrelated context in which Principal
serves as an investment manager.
Finally, McCaffree argues that Principal inadequately disclosed the additional
layer of management fees for the underlying Principal mutual funds in which separate
account contributions were invested. McCaffree’s complaint did not allege that the
mutual fund fees were excessive, and in its reply brief McCaffree confirms that the
mutual fund fees are relevant to its claims only to the extent that these fees
demonstrate that the additional separate account fees were excessive. Because the
mutual fund fees are not “subject to complaint,” Pegram, 530 U.S. at 226, we decline
to decide whether Principal’s alleged failure to disclose those fees breached a
fiduciary duty.
III.
Principal’s enforcement of the terms of its contract with McCaffree did not
implicate any fiduciary duties, and McCaffree failed to establish a connection
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between its excessive fee allegations and any post-contractual fiduciary duty Principal
may have owed to plan participants. Accordingly, we affirm the district court’s
dismissal of McCaffree’s claims.
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