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Practice Management > Compensation and Fees

MassMutual settles revenue-sharing case

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MassMutual settled a long running suit with a class of plan sponsors that could impact how all retirement service providers arrange compensation, and disclose compensation to their plan sponsor-clients.

In Golden Star Inc. v. MassMutual Life Insurance Co., the plaintiffs, a Kansas City-based flooring maintenance company and sponsor of two 401(k) plans, alleged that MassMutual, which had been servicing the GSI plans since 1993, breached its fiduciary duties when it received “kickbacks” from third-party mutual fund companies.

MassMutual never denied the revenue-sharing agreements. But the company did deny that it was a fiduciary, and therefore was not beholden to ERISA’s prohibited transaction rules.

That changed last May, when, in Massachusetts U.S. District Court, Judge Patti Saris ruled that MassMutual was a “functional fiduciary” after MassMutual requested the suit be thrown out on the grounds that it was not a fiduciary.

The decision paved the way for the two-part settlement, which directs MassMutual to pay $9.5 million to current and former retirement plans serviced by MassMutual group annuity contracts from October 19, 2005 up to the date of the settlement approval.

The question of whether or not MassMutual was acting as a fiduciary hinged on the fact that the service provider used its own discretion in establishing how it was compensated when it serviced GSI’s plans, which included designing investment options and record keeping.

In its agreement with GSI, MassMutual retained “exclusive and absolute ownership and control” of the plans’ assets, according to court documents.

It also set its own compensation, which was based on fees administered to each enrollee’s account of up to 1 percent of the average daily value of the investments, and revenue-sharing payments based on expense ratios from third-party mutual funds.

See also: MassMutual in bid to capture small-plan market

Some of the mutual funds selected had higher expense ratios than others, meaning higher levels of compensation for MassMutual.

“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,” wrote Judge Saris last May.

The settlement also requires MassMutual to inform all of its sponsor clients going forward of when it makes changes to investment line-ups, and requires MassMutual to have the sponsors’ consent when making changes.

MassMutual will also have to disclose the expense ratios of the funds it selects, and the amount of money it earns from revenue-sharing payments.


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