MassMutual Settles ‘Functional Fiduciary’ Case

By Nevin Adams • 11/4/2014 • 0 Comments

MassMutual and Golden Star, Inc. have asked the court to approve a settlement in their 401(k) revenue-sharing suit. 

The settlement (which, according to the Fiduciary Matters Blog, does not involve a separate lawsuit brought by MassMutual’s own employees), allows for two settlement classes to be approved: 

  • current and past retirement plan customers of MassMutual; and
  • current and future retirement plan customers of MassMutual.

According to the Fiduciary Matters Blog, “excluded from the Classes are (1) Defendant, (2) any administrators of retirement plans (“Plans”) for which Defendant’s directors, officers or employees are beneficiaries, (3) any Plans for which the Judge(s) to whom this case is assigned or any other judicial officer having responsibility for this case is a beneficiary, (4) any Plans that were former Hartford Plans (as that term is defined in the Settlement Agreement), and (5) any Plans which are invested through registered products.”

Settlement Terms

The first class will receive a payment of $9,475,000, which will be reduced a claim for attorney’s fees up to one-third and costs up to $315,000, according to the Fiduciary Matters Blog.  

As for the second class, MassMutual has agreed to make a number of changes to the investment menu(s) it offers, including notice of changes to those menus, an agreement not to delete/change/replace options without notice and obtaining plan fiduciary consent, and a disclosure of the expense ratios for each fund (including SIA Management Fees or other direct expenses), as well as the revenue paid to MassMutual from a fund (including disclosure of those funds that make no revenue sharing payments to MassMutual, and modifications to their written point of sale disclosure, among other things. 

The settlement provides that MassMutual will include in the point-of-sale disclosure “…an explanation of the option for Plan customers to pay all fees to Defendant through direct charges and, if requested by the plan sponsor or its advisor, will offer a menu of Funds for which Defendant does not receive revenue sharing payments.”

The Case 

In the case, MassMutual offered Golden Star (the plan sponsor and named fiduciary) record keeping and other services for its 401(k) plan. MassMutual defined the menu of investment options offered, and Golden Star selected the options to be offered in its plan from that menu. The investment funds were packaged as separate accounts owned by MassMutual as an insurer.  

MassMutual collected revenue sharing payments made by the mutual funds for the investments from the separate accounts placed in their funds. Mutual funds that made these payments generally charged higher fees to cover the payments. MassMutual claimed that the revenue sharing payments offset fees and payments it would have otherwise collected from Golden Star’s plan for the management of the separate accounts, though Golden Star disputed this claim.

In May the district court found the record “impenetrable” on whether and how MassMutual charged fees on its separate accounts, and thus held there was a triable issue regarding whether MassMutual acted as a fiduciary in setting its own fees, according to a report by Proskauer Rose LLP. The court distinguished between providers that negotiate compensation when the contract is first agreed to, and service providers that retain discretion in that contract to unilaterally adjust their compensation. The court stated that in the latter case, the control over compensation would make the service provider a “functional fiduciary” with respect to its compensation.

The court also determined that MassMutual was not a fiduciary with respect to fund selection because MassMutual never exercised its discretion to change the investment options offered by the plan, tying that to the criteria that the first prong used to determine fiduciary status provides that a party is a fiduciary “to the extent” it exercises discretionary authority or control over plan management, or exercises any authority or control over plan management. 

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