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Appeals Court: Group Life RAAs Fall Outside ERISA

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WASHINGTON BUREAU – A life insurer’s fiduciary duty under the Employee Retirement Income Security Act (ERISA) ends once it deposits group life policy benefits into a retained asset account (RAA), according to a federal appeals court.

A 3-judge panel at the 2nd U.S. Circuit of Appeals came to that conclusion in a ruling on Faber vs. Metropolitan Life Insurance Company, Number 09-4901, a suit filed on behalf of beneficiaries of group life policies written by Metropolitan Life Insurance Company, a unit of MetLife Inc., New York (NYSE:MET).

The plaintiffs in the Faber case are seeking class-action status.

The 2nd Circuit panel ruling conflicts with a ruling issued by the 1st U.S. Circuit Court of Appeals in another RAA case, Mogel vs. Unum, Number 08-1334. That decision was handed down in December 2008.

Because of the conflict, the plaintiffs will immediately seek a rehearing, according to John Bell, an Augusta, Ga., lawyer who represents the plaintiffs in the 2nd Circuit case.

Bell says he also has similar suits under way in Boston, Philadelphia and Maine.

MetLife says in a statement that it is pleased that the 2nd Circuit affirmed the dismissal of the suit.

“The 2nd Circuit agreed with the district court that the complaint failed to state a claim for breach of fiduciary duties under ERISA,” MetLife says.

An RAA is an arrangement for paying insurance benefits through a vehicle that resembles a checking account rather than sending the beneficiary a check for the whole amount.

Critics say RAAs often pay lower interest rates than bank accounts and are not insured by the Federal Deposit Insurance Corp.

Supporters say RAAs pay rates comparable to the rates provided by other safe, highly liquid accounts, are backed by state insurance guaranty funds, and give grieving beneficiaries time to postpone making complicated financial decisions.

In the New York RAA case, the lead plaintiffs are Carol D. Faber and the estate of Russell E. Young.

Faber was a beneficiary of a group life insurance policy provided by her husband’s employer, Eastman Kodak Company, Rochester, N.Y.

The Young estate was the beneficiary of a policy provided by General Motors Corp., Detroit, according to court filings.

Bell argued in court filings that MetLife breached a fiduciary duty imposed by ERISA “by retaining and investing for its own profit life insurance proceeds due to them under employee benefit plans that MetLife administered.”

The 3-judge 2nd Circuit panel concludes in its ruling that the district court judge, Judge Howard Baer, correctly determined that plaintiffs had failed to state a claim.

“MetLife discharged its fiduciary obligations under ERISA when it established the RAAs in accordance with the plans at issue, and did not misuse ‘plan assets’ by holding and investing the funds backing the accounts,” Judge Barrington Parker writes in the opinion explaining the ruling. “Accordingly, we affirm.

The U.S. Department of Labor submitted a friend-of-the-court brief supporting MetLife, arguing that MetLife’s fiduciary duty ended when it put the money in the RAA.

In a letter brief submitted at the request of the 2nd Circuit panel, Labor Department officials say U.S. Labor Secretary Hilda Solis has the view that “(1) the guaranteed benefit policy exemption does not apply to the TCAs [Total Control Account] at issue in this case, (2) MetLife and the Plans effectively discharge their ERISA obligations when they furnish beneficiaries a TCA in accordance with plan terms, and accordingly (3) MetLife does not retain plan benefits by holding and managing the assets that back the TCA.”

Bell says he has found during discovery that an average of about 3% of the monies in RAA accounts is never claimed.

MetLife executives testified recently in Florida at a hearing on unclaimed life insurance assets that the company holds $12 billion in RAA assets.

Bell says he has found that about 80% of the funds in RAAs get drawn down within the first year the account is established.

Most insurers hire third parties to manage the accounts, Bell says.

Other RAA coverage from National Underwriter Life & Health: