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Judges affirm AUL Insurance owed no fiduciary duty to 401(k) plan

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The 7th Circuit Court of Appeals has ruled in favor of an insurance company on a 401(k) plan trustee’s lawsuit that the insurance company's revenue-sharing practices breached a fiduciary duty under the Employment Retirement Income Security Act of 1974.

“This case presents a challenge to the practice known in the 401(k) services industry as ‘revenue sharing’– an arrangement allowing mutual funds to share a portion of the fees that they collect from investors with entities that provide services to the mutual funds, the investors, or both. … As the existence and extent of revenue sharing has become more widely known, some have expressed concern that the practice unduly benefits mutual funds and 401(k) service providers to the detriment of plan participants. This concern has fueled a number of lawsuits alleging that the practice violates the Employee Retirement Income Security Act of 1974 (ERISA),” Judge Diane Wood wrote in Robert Leimkuehler, as trustee of and on behalf of the Leimkuehler Inc. Profit Sharing Plan, and on behalf of all others similarly situated v. American United Life Insurance Co., 12-1081, 12-1213, & 12-2536.

Leimkuehler Inc. operates a 401(k) plan for its employees and American United Life Insurance Co. provides services to the plan. Plan participants’ contributions in mutual funds are deposited into a separate account that AUL owns and controls. AUL uses the funds in that account to invest in whatever mutual funds the plan participants have selected.

Robert Leimkuehler as trustee sued alleging AUL’s revenue-sharing practices breached a fiduciary duty to the plan under ERISA. The District Court granted AUL’s motion for summary judgment, finding AUL didn’t owe any fiduciary responsibility to the plan with respect to its revenue-sharing practices and that it wasn’t a “functional fiduciary” under 29 U.S.C. Section 1002(21)(A).

“We therefore confirm that, standing alone, the act of selecting both funds and their share classes for inclusion on a menu of investment options offered to 401(k) plan customers does not transform a provider of annuities into a functional fiduciary under Section 1002(21)(A)(i),” Wood wrote.

The judges also noted that AUL’s control over the separate account can support a finding of fiduciary duty only if Leimkuehler’s claims arise from AUL’s handling of the separate account.

“They do not. As we noted earlier and as Leimkuehler concedes, AUL selects share classes and decides how much it will receive in revenue sharing when it designs its investment-options menu. Those steps occur well before a Plan participant deposits her contributions in the separate account and directs AUL where to invest those contributions. Because the actions Leimkuehler complains of do not implicate AUL’s control over the separate account, the separate account does not render AUL a fiduciary under the circumstances of this case,” Wood wrote.

The judges also affirmed the denial of AUL’s motion for attorney fees or costs under ERISA or under the Federal Rule of Civil Procedure 54(d).
 

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