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Portfolio > Mutual Funds

Judge rejects MassMutual’s bid to dismiss ERISA suit

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A federal judge in Massachusetts has ruled that MassMutual Life, acting in its role as a third-party administrator of plan sponsors, is a “functional fiduciary” subject to ERISA statutes. 

The case pits Golden Star Inc., a Kansas City-based flooring maintenance company and sponsor of two 401(k) plans, against MassMutual Life Insurance Co. According to court documents, GSI, which is hoping to win class-action status in its action, alleges that its plan administration provider, MassMutual, violated ERISA statutes when it received revenue-sharing payments from third-party mutual funds.

MassMutual sought a summary judgment in hopes of getting the claim dismissed on the basis that its relationship with GSI did not mean it was acting as a fiduciary under ERISA. But U.S. District Judge Patti B. Saris, in a ruling on May 20, denied MassMutual’s request, agreeing with the plaintiffs that the third-party administrator did assume fiduciary duties because of its discretionary role in determining its compensation.

“The case law is clear that a service provider’s retention of discretion to set compensation can create fiduciary duties under ERISA with respect to its compensation,” the judge wrote.

MassMutual has been servicing GSI retirement plans since 1993. Its services have included designing menu options of mutual funds as well as recordkeeping.

MassMutual’s contract with GSI says that MassMutual has “exclusive and absolute ownership and control” of the participants’ retirement assets. This means MassMutual can add funds to the menu of options for employees as it sees fit. It has made changes in fund options since 2005, and also incorporated changes that GSI requested.

MassMutual is compensated by payments from GSI, and fees administered to each enrollee’s account of up to 1 percent of the average daily value of each enrollee’s investments.

MassMutual also has arrangements with third-party mutual funds that allow for revenue-sharing payments based on a mutual fund’s expense ratio.

Some funds have higher expense ratios, which means higher compensation for MassMutual.

GSI contends that MassMutual doesn’t really provide any services to the funds MassMutual selects, and that the fees it generates from third-party mutual funds are effectively a “pay-to-play” arrangement. 

RSPs are not necessarily a bad thing from the Labor Department’s perspective. In fact, ERISA welcomes them when they are used to offset administrative costs to enrollees. 

The thinking is that it’s better to collect from wealthy mutual funds if it saves money for individual workers. Indeed, this would be in keeping with the spirit of fiduciary designation. 

Therein resides the nub of the case. GSI claims that there was no dollar-for-dollar savings for its employees. If savings aren’t returned to the individual enrollee, then the RSP from mutual fund companies are suspect under ERISA.

The case now awaits a decision by Saris on whether to grant the plaintiffs class-action status.


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