Borneman v. Principal Life Insurance Company, 4:02-cv-90334 (S.D. Iowa 11/25/2003)
| Decision Date | 25 November 2003 |
| Docket Number | 4:02-cv-90334. |
| Parties | BRIAN BORNEMAN and MELISSA BORNEMAN, Plaintiffs, v. PRINCIPAL LIFE INSURANCE COMPANY, an Iowa corporation, and THE PRINCIPAL SELECT SAVINGS PLAN FOR EMPLOYEES, a retirement plan, Defendants. |
| Court | U.S. District Court — Southern District of Iowa |
Plaintiff's Brian and Melissa Borneman filed this action on July 12, 2002, alleging various claims against Defendant Principal Life Insurance Company ("Principal") and Defendant The Principal Select Savings Plan for Employees ("Plan") under the Employee Retirement Income Security Act ("ERISA"), 29 U.S.C. § 1001 et seq. Plaintiff Brian Borneman was an employee of Defendant Principal and a participant in the Plan. Plaintiff Melissa Borneman is Brian Borneman's wife and was a beneficiary under the Plan. Their claims arise from Principal's imposition on Plan participants of a restriction on market timing trading within the investment accounts provided by the Plan. Specifically, Plaintiffs have asserted claims under 29 U.S.C. § 1132(a)(1)(B) for recovery of benefits under the Plan, under 29 U.S.C. § 1132(a)(2) and 1132(a)(3) for breach of fiduciary duty and invalidation of the market timing trading restriction, under 29 U.S.C. § 1140 for retaliation and interference, and under 29 U.S.C. § 1132(c) for failure to supply plan documentation.
On August 18, 2003, Defendants moved for summary judgment on all of Plaintiffs' claims. On September 26, 2003, Plaintiffs submitted an opposition to Defendants' motion, and requested that the Court grant summary judgment to Plaintiffs on each claim.1 The Defendants submitted a reply brief on October 17, 2003, and oral argument was held on October 30, 2003. The matter is fully submitted. For the reasons detailed, below, the Court grants Defendants' motion in part and denies it in part, and grants Plaintiffs' motion in part and denies it in part.
Plaintiff Brian Bomeman began working for Principal in 1994. During the time period relevant to this action, approximately the beginning of 2001 until November of 2001, Mr. Borneman worked as an assistant product development consultant in Principal's Product Development Department. The Product Development Department is part of Principal's Retirement and Investor Services ("RIS") division
Defendant Principal maintains the Principal Select Savings Plan for Employees, which is a 401(k) plan, for its employees. Principal plays multiple roles within the context of the Plan. Principal is the Plan's sponsor and administrator. The Plan is funded through a group annuity contract ("GAC") issued by Principal, which also makes Principal the Plan insurer and investment manager. As an insurance company, Principal issues group annuity contracts to fund its clients' retirement plans. Principal in its role as an employer is one of the clients who uses Principal in its role as an insurer and investment manager to fund its employee retirement plan. In these contracts, Principal agrees to pay benefits to a retirement plan's participants and beneficiaries in a manner consistent with the employer's plan. The assets backing Principal's contractual promises with its clients are invested in various separate accounts, which function much like mutual funds. In a 401(k) plan, which is the type of plan that Plaintiff Brian Borneman participated in during his employment with Principal, the individual plan participants direct their contributions to specific separate accounts. Each separate account has a specific investment focus. During the time period relevant to this action, Principal maintained six separate accounts that focused on international equities. The benefits due to individual plan participants are based on the returns associated with the separate accounts they have selected.
During the second half of 2000, Principal began to see high fluctuations of cash flow in the separate accounts. Toward the end of the year, Principal came to the conclusion that market timing trading was a factor in the fluctuations it was seeing. Market timing trading, in essence, involves short-term trades between domestic and international separate accounts. Shares in Principal's separate accounts are repriced at 4:00 PM Eastern Standard time each day, the time that the U.S. stock market closes. When a participant in Principal's 401(k) plan purchases shares in a separate account during the day, the participant does so at the price prevailing at 4:00 PM. The 4:00 PM prices are calculated on the basis of the last traded price of the stocks in that fund. The prices for the international separate accounts are among those that are recalculated at 4:00 PM, however by this time the Japanese and European markets have already been closed for some time.
In an internal study, Principal found that the performance of its international separate accounts on any given day was highly correlated with the performance of the NASDAQ on the previous day, meaning that the NASDAQ's performance on any one day could be used, albeit perhaps imperfectly, as a predictor of what would happen in the international separate accounts on the following day. The correlation between the domestic markets and Principal's international separate accounts provided the opportunity for low-risk arbitrage between the domestic and international separate accounts. A participant could look for an increase in the NASDAQ or another domestic market index, then purchase shares in one of the international separate accounts that day. The participant would buy in at the price reflected at 4:00 PM, after the relevant international markets had already closed and before the international markets had responded to the NASDAQ increase. Because of the correlation between the NASDAQ and the international separate accounts, the likelihood was that the foreign markets would increase the next day, the value of the investor's investment from the previous day would rise, and the investor would then sell the international shares to capture the gain and move his or her money back to domestic investments to await another opportunity to invest internationally. As Principal did not charge fees for transfers between the separate accounts, a participant would not incur costs as a result of these trades.
As will be discussed in more detail below, Principal decided that market timing trading was having a negative impact on the performance of its international separate accounts. To deal with this issue, Principal decided to take steps to limit market timing trading in the separate accounts of its various plans. The plan document that governs the Plan provides that Plan participants can direct contributions and order transfers "to the extent permitted by the . . . [GAC]." In a Separate Account Investment Rider, which is a part of the GAC, there is language expressing that Principal in its capacity as investment manager "reserve[s] the right to defer or stop your ability to direct Contributions and transfers to a Separate Account." It was this language upon which Principal relied as authority to impose the market timing trading restriction.
In order to implement the limitation, Principal first identified the corporate clients and individual participants who were engaged in market timing trading. As of January 2001, Principal had identified among its clients, not simply within the Plan it sponsored for its own employees, 36 plan sponsors and 80 individuals who were engaged in market timing trading. The company sent each of the affected plan sponsors a letter indicating that it included members who had initiated an excessive number of one-day transfers between domestic and international separate accounts. The letter asked each sponsor to voluntarily control the activity, and indicated that if the market timing did not stop Principal would enforce new guidelines limiting member transfers involving international separate accounts to $30,000 per day.
Plaintiff Brian Borneman was one of the individuals who was identified as having engaged in market timing trading within the separate accounts of the Plan. Plaintiff became aware of the correlation between domestic market indices and Principal's international separate accounts after a market professional apprised him of the connection between international economies. Plaintiff began engaging in market timing trading around September or October of 2000. Market timing trading was very profitable for Mr. Borneman. He claims that during the first four months of 2001 he earned approximately an 11% return on his account, in a market that was down 20 to 25%. In February of 2001, Plaintiff and other members of his department received an e-mail explaining that Principal, in its role as investment manager to the Plan, was asking some of its customers to stop excessive market timing trading by participants in their plans. The e-mail indicated, among other things, that market timing trading increased the cost of portfolio management, increased brokerage transaction costs, and decreased investment performance for all individuals using the particular investment option being traded in this manner. Attached to the e-mail was a sample letter to customers, which indicated that if the activity did not stop, Principal would restrict market timing trading for each plan participant to $30,000 per day. This e-mail was not sent to Plaintiff in his capacity as a Plan participant and it did not expressly call upon him to take any action with respect to his own market timing trading. Plaintiff continued market timing trading after receiving this correspondence.
In the spring of 2001, in order to comply with Principal's request to voluntarily limit employee market timing trading, Tammy DeHaai, who acted as Plan Administrator for Principal, obtained a list of Plan participants who were engaged in market timing trading. Brian Borneman was one of the individuals identified. DeHaai then contacted the...
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