The U.S. District Court for the District of Colorado granted and dismissed in part a motion filed by Great-West to dismiss a lawsuit filed by a participant invested in Great-West’s annuity products. The complaint alleges that Great-West breached its fiduciary duty of loyalty under ERISA by setting artificially low predetermined interest rates and charging excessive fees for its own profit taking. Self-dealing transactions were also alleged causing the plaintiff’s retirement plan to engage in prohibited transactions with a party in interest, also in violation of ERISA.
More specifically, the case involves the Great West Key Guaranteed Portfolio Fund, offered within the plaintiff’s employer retirement plan in which the plaintiff invested. The relationship between Great-West and the retirement plan is governed by a group annuity contract entered into March 4, 2008, which provides for a participant’s investment to accrue interest at a rate set prior to each quarter. The plaintiff claims that the interest rate is determined absent of any methodology and solely by Great-West. Of note, the effective annual interest rate is guaranteed never to be less than 0% and investments into the fund are deposited into Great-West’s general account.
Great-West filed the motion to dismiss on the basis that the Guaranteed Portfolio Fund falls under the guaranteed benefit policy (GBP) exemption from ERISA, which exempts Great-West from the role of an ERISA fiduciary. Additionally, Great-West asserted that the plaintiff’s allegations of self-dealing do not apply as Great-West cannot be both a fiduciary and a party in interest under ERISA 406(a).
Regarding the GBP exemption, the plaintiff contended that the annuity contract’s provision permitting Great-West to set an interest rate of 0% means that benefits are not really guaranteed and places the burden of risk on participants. The plaintiff also contended that the annuity contract is a “plan asset”, and Great-West does indeed act as a fiduciary in determining the interest rate to the discretionary administration of the contract. The case of John Hancock Mutual Life Insurance Co. vs. Harris Trust & Savings Bank supports these arguments suggesting that courts consider the insurer’s guarantee of a reasonable rate of return and that plan participants are at risk “inasmuch as the future amount of benefits… can fall to zero.”
Although the court recognized that the Great-West Guaranteed Key Guaranteed Portfolio fulfills criteria of a GBP – allocating the risk of loss of principal to the insurer and guaranteeing a benefit at the beginning of each quarter – the Court could not definitively conclude that the rate of return was in fact ‘reasonable,’ that Great West’s “discretionary authority did not extend to management of Plan assets, or that the contract’s discretionary rate model did not allocate risk to plan participants invested sufficient to eliminate fiduciary duties.” The court therefore denied Great-West’s motion to dismiss on this basis.
Regarding the allegations of self-dealing, the plaintiff claimed that Great-West is “a party in interest with respect to the plans,” as well as a fiduciary of the plans and as such, conducted prohibited transactions by selling the annuity contracts to the plans and receiving exorbitant compensation for services provided. As aforementioned, Great-West claimed this challenge should be dismissed as Great-West cannot be both a fiduciary and a party in interest according to ERISA 406(a). On this count, the court concluded that the plaintiff’s reasoning was not properly constructed, and dismissed this claim. That said however, the plaintiff can still seek to amend the claim and file an appropriate motion in that regard.
planadviser.com; June 29, 2015.