Santomenno v. Transamerica Life Ins. Co., 16-56418

• Decision Date: 23 February 2018
• Docket Number: No. 16-56418,16-56418
• Citation: 883 F.3d 833
• Parties: Jaclyn SANTOMENNO; Karen Poley ; Barbara Poley, individually and on behalf of Employee Retirement Income Security Act of 1974, etc.; as an investor in the Lommis Sayles Investment Grade Bond Ret. Opt. and the First American Mid Cap Growth Opportunities Inv. Opt., etc.; as an investor of Vanguard Target Ret., Plaintiffs–Appellees, v. TRANSAMERICA LIFE INSURANCE COMPANY; Transamerica Investment Management, LLC; Transamerica Asset Management, Inc., Defendants–Appellants.
• Court: U.S. Court of Appeals — Ninth Circuit

883 F.3d 833

Jaclyn SANTOMENNO; Karen Poley ; Barbara Poley, individually and on behalf of Employee Retirement Income Security Act of 1974, etc.; as an investor in the Lommis Sayles Investment Grade Bond Ret. Opt. and the First American Mid Cap Growth Opportunities Inv. Opt., etc.; as an investor of Vanguard Target Ret., Plaintiffs–Appellees,

v.TRANSAMERICA LIFE INSURANCE COMPANY; Transamerica Investment Management, LLC; Transamerica Asset Management, Inc., Defendants–Appellants.

No. 16-56418

United States Court of Appeals, Ninth Circuit.

Argued and Submitted November 17, 2017, Pasadena, California

Filed February 23, 2018

Brian D. Boyle (argued), Shannon Barrett, and Anton Metlitsky, O'Melveny & Myers LLP, Washington, D.C.; Catalina J. Vergara and Christopher B. Craig, O'Melveny & Myers LLP, Los Angeles, California; for Defendants–Appellants.

Arnold C. Lakind (argued) and Stephen Skillman, Szaferman Lakind Blumstein & Blader P.C., Lawrenceville, New Jersey; Lynn Lincoln Sarko, Derek W. Loeser, Michael D. Woerner, and Gretchen S. Obrist, Keller Rohrback LLP, Seattle, Washington; for Plaintiffs–Appellees.

Eric S. Mattson and Daniel R. Thies, Sidley Austin LLP, Chicago, Illinois; Lisa Tate, Vice President, Litigation & Associate General Counsel, American Council of Life Insurers, Washington, D.C.; Janet M. Jacobson, American Benefits Council, Washington, D.C.; Kate Comerford Todd and Janet Galeria, U.S. Chamber Litigation Center, Washington, D.C.; for Amici Curiae American Council of Life Insurers, American Benefits Council, and Chamber of Commerce of the United States of America.

Mary Ellen Signorille and William Alvarado Rivera, AARP Foundation Litigation, Washington, D.C., for Amici Curiae AARP and AARP Foundation.

Before: Jacqueline H. Nguyen and Andrew D. Hurwitz, Circuit Judges, and Richard Seeborg,^* District Judge.

HURWITZ, Circuit Judge:

The Employee Retirement Income Security Act of 1974 ("ERISA"), Pub. L. 93-406, 88 Stat. 829 (codified at 29 U.S.C. § 1001 et seq . ), imposes fiduciary duties on various parties in connection with retirement plans. This case turns on when and under what circumstances those duties attach. The district court found that a provider breached its fiduciary duties to plan beneficiaries first when negotiating with an employer about providing services to the plan and later when withdrawing predetermined fees from plan funds. The court accordingly denied defendants' motion to dismiss and certified three plaintiff classes. We disagree and reverse.

I. Background

A. TLIC's Relationship with 401(k) Plans

The plaintiffs are members of employer-supported, defined-contribution 401(k) plans governed by ERISA. 29 U.S.C. § 1002(34). Because the daily administration of the plans often requires particularized expertise, employers commonly contract with third-party administrators to operate the plans.

Plaintiffs' employers contracted with Transamerica Life Insurance Company ("TLIC") to manage and operate their retirement plans. Each employer entered into an Application and Agreement for Services ("Services Agreement") and a Group Annuity Contract ("GAC") with TLIC. From a list of potential investment options provided by TLIC in the GAC, the employers selected those offered to employees. The list of potential investments includes several advised and managed by TLIC affiliates, Transamerica Asset Management ("TAM") and Transamerica Investment Management ("TIM"). Many of the investments offered in the GAC have multiple share classes, and TLIC did not always offer the lowest-priced share class. If an employer selects a "model line-up" of investment options, TLIC warrants that the bundle satisfies ERISA's "[p]rudent man standard." See 29 U.S.C. § 1104(a)(1).

After an employer chooses an investment bundle, TLIC structures each selected investment option (typically a mutual fund) as a separate account. The contributions of all plan members choosing the option are pooled in the separate account. Pooling "substantially reduces the mutual funds' administrative, marketing, and service costs" because the fund effectively has only one investor—the separate account. Leimkuehler v. Am. United Life Ins. Co. , 713 F.3d 905, 909 (7th Cir. 2013). Under the Service Agreement, TLIC tracks the investments of individual employees, among other administrative tasks.

TLIC's compensation is set in the GAC as a fixed percentage of the assets in each separate account. The GAC contains a specific schedule of fees for each separate account. TLIC collects its fees on a daily basis by withdrawing them from the separate accounts.

The managers of the investment vehicles underlying the pooled accounts also charge fees. And, TLIC receives fees separately from these investment managers. See id. at 909 (describing this practice). TLIC fully disclosed these arrangements.

B. Procedural Background

The complaint alleged that TLIC violated ERISA by (1) charging fees on the separate accounts in addition to those charged by the managers of the underlying investments; (2) charging an "Investment Management Charge" on the separate accounts; (3) receiving revenue sharing payments from managers of the underlying investments; (4) "failing to invest in the lowest priced share class of the mutual funds that underlie the separate account investment options that invest in mutual funds"; and (5) "negotiating the traditional lower fees that are associated with these investment options but retaining them rather than passing the savings along to Plaintiffs." The complaint also alleged that TIM and TAM "knowingly participat[ed]" in TLIC's statutory violations.¹

TLIC moved to dismiss, asserting that it did not violate ERISA because it was "not a fiduciary with respect to the terms of its own compensation."² The district court denied the motion, and subsequently certified three classes: (1) a "TLIC Prohibited Transaction Class," which claimed "that TLIC's practice of taking the IM/Admin fee from plan assets is [ ] a prohibited transaction" under 29 U.S.C. § 1106(b)(1) ; (2) a "TIM and TAM Prohibited Transactions" class, which claimed "that TLIC committed a prohibited transaction when it acted on behalf of or represented TIM and TAM, whose interests were adverse to the plans," in violation of 29 U.S.C. § 1106(b)(2) ; and (3) a "TIM and TAM Excessive Fees" class, which claimed "that TLIC breached three duties under 29 U.S.C. § 1104(a)(1)" by allowing TIM and TAM to charge fees higher than those charged to non-401(k) clients.

The district court certified its Rule 23 orders and the order denying the motion to dismiss for immediate appeal under 28 U.S.C. § 1292(b), and we accepted the appeal. We review orders granting or denying a motion to dismiss under Rule 12(b)(6) de novo, Camacho v. Bridgeport Fin. Inc. , 430 F.3d 1078, 1079 (9th Cir. 2005), and the class certification order for abuse of discretion, Pulaski &Middleman, LLC v. Google, Inc. , 802 F.3d 979, 984 (9th Cir. 2015).

II. Discussion

A. Statutory Framework

"ERISA is ... a comprehensive and reticulated statute, the product of a decade of congressional study of the Nation's private employee benefit system." Mertens v. Hewitt Assocs. , 508 U.S. 248, 251, 113 S.Ct. 2063, 124 L.Ed.2d 161 (1993) (internal quotation marks omitted). It seeks "to ensure that employees will not be left empty-handed" by imposing fiduciary duties on those responsible for management of retirement plans. Lockheed Corp. v. Spink , 517 U.S. 882, 887, 116 S.Ct. 1783, 135 L.Ed.2d 153 (1996).

An employer that forms an ERISA plan is a statutory fiduciary. See 29 U.S.C. § 1102(a). But, a party not named in the plan also becomes a fiduciary if

(i) he exercises any discretionary authority or discretionary control respecting management of such plan or exercises any authority or control respecting management or disposition of its assets, (ii) he renders investment advice for a fee or other compensation, direct or indirect, with respect to any moneys or other property of such plan, or has any authority or responsibility to do so, or (iii) he has any discretionary authority or discretionary responsibility in the administration of such plan.

29 U.S.C. § 1002(21)(A). Such non-named fiduciaries are sometimes referred to as "functional" fiduciaries, and plan service providers, such as TLIC, can under the named circumstances become functional fiduciaries. See, e.g. , IT Corp. v. Gen. Am. Life Ins. Co. , 107 F.3d 1415, 1419–22 (9th Cir. 1997) ; Parker v. Bain , 68 F.3d 1131, 1139–40 (9th Cir. 1995).

Whether named or functional, an ERISA fiduciary has a "duty of care with respect to management of existing [ ] funds, along with liability for a breach of that duty." Lockheed Corp. , 517 U.S. at 887, 116 S.Ct. 1783. The fiduciary must "discharge his duties with respect to a plan solely in the interest of the participants and beneficiaries and [ ] for the exclusive purpose of [ ] providing benefits to participants and their beneficiaries." 29 U.S.C § 1104(a)(1). The fiduciary also must conduct business on behalf of the plan "with the care, skill, prudence, and diligence under the circumstances then prevailing that a prudent man acting in a like capacity and familiar with such matters would use in the conduct of an enterprise of a like character and with like aims." 29 U.S.C. § 1104(a)(1)(B). Accordingly, the fiduciary cannot "deal with the assets of the plan in his own interest or for his own account" or "receive any consideration for his own personal account from any party dealing with such plan in connection with a transaction involving the assets of the plan." 29 U.S.C. § 1106(b)(1), (3).

B. Alleged Pre–Administration Breaches

Plaintiffs alleged that TLIC violated its fiduciary duties by (1) charging administrative and investment fees on the separate accounts; (2) receiving revenue sharing payments from investment managers and "negotiating the traditional lower fees that are associated with [TLIC's] investment options but retaining them rather than passing the savings...