A federal judge in Iowa has dismissed a class-action brought by a 401(k) plan sponsor alleging Principal Life Insurance Co. breached its fiduciary duties by charging excessive fees associated with the servicing of the plans.
McCaffree Financial Corp., the lone named plaintiff in the case, alleged Principal charged "grossly excessive" investment management fees to plan participants by structuring investment products that only invested in Principal propriety mutual funds.
"By structuring its investment products in this way, Principal reaps substantial fees on top of the fees charged by its own mutual funds. Nothing justifies this extra layer of fees," the complaint, filed last March, said.
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McCaffee is a privately held financial services company based in Overland Park, Kansas. Participants had access to 29 of Principal's separate accounts, all correlated with proprietary mutual funds.
The plaintiff alleged that participants got "little or no" benefit from Principal's "wrapping" of contributions into the separate accounts.
"Other investment managers for defined-contribution retirement plans routinely offer to participants the option to invest directly in mutual funds. Such direct investments are typically in a share class with relatively low fees comparable to the institutional share class fees," argued the plaintiff's attorneys.
But all claims against The Principal were dismissed on the grounds that it was not acting as a plan fiduciary because service providers "do not act as fiduciaries when negotiating the terms of their service as long as the service providers do not control the named fiduciary's negotiation and approval of those terms," according to a post on Proskauer's ERISA Practice Center Blog.
While Principal was acting as a fiduciary in exercising discretion as an investment advisor, the claims the plaintiffs brought did not arise from those actions, but from other services to the plan that were not subject to fiduciary obligations.
The plaintiff has filed an appeal.
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Nick Thornton
Nick Thornton is a financial writer covering retirement and health care issues for BenefitsPRO and ALM Media. He greatly enjoys learning from the vast minds in the legal, academic, advisory and money management communities when covering the retirement space. He's also written on international marketing trends, financial institution risk management, defense and energy issues, the restaurant industry in New York City, surfing, cigars, rum, travel, and fishing. When not writing, he's pushing into some land or water.
