Circuit Courts Define when a Stable Value Fund Issuer’s Control over Credited Interest Rate Makes It an ERISA Fiduciary
Two recent cases from the Eighth and Eleventh Circuits have provided further clarity as to when a stable value fund sponsor’s control over the fund’s credited interest rate make is a de facto ERISA fiduciary. (The credited interest rate generally refers to the rate of return the fund offers to investors in the stable value fund at any particular time). While the two circuits reached different conclusions, both adopted the same test. This test may become the standard in the circuit courts more generally.
This test has two parts. A stable value fund sponsor’s control over the credited rate makes it an ERISA fiduciary if (1) in setting the rate, the issuer does not follow a “specific contractual term,” but instead exercises its own discretion; and (2) the sponsor “took a unilateral action” by setting the rate “without the plan or its participants having an opportunity to reject its decision.”
First, in Teets v. Great-West Life & Annuity Ins. Co., 919 F.3d 1232 (10th Cir. 2019), the Eleventh Circuit dismissed a putative class action alleging that Great-West became an ERISA “functional” fiduciary because it had the contractual right to adjust the credited interest rate for the stable value fund it offered. Great West would set the rate quarterly. It would keep the spread between the credited interest rate and the actual return on the fund’s investment. Although this power meant that Great-West was taking “unilateral” action under the first part of the test, the Tenth Circuit held that the investing plans had the right to “reject its decision.” The investing plans had the right to promptly withdraw from the fund after Great West set the credited interest rate. And although Great West reserved the right to retain a withdrawing plan’s assets for 12 months, the evidence showed that over 3,000 plans had stopped offering this fund and Great West had never exercised its retention right.
The Eighth Circuit reached a different result in Rozo v. Principal Life Ins. Co., 949 F.3d 1071 (8th Cir. 2020). In Rozo, Principal had a similar right to declare a credited interest rate for its stable value fund, which the Eighth Circuit similarly concluded constituted a discretionary act under the first prong of the Teests test. But the court held that the investing plans, as a practical matter, did not have the “opportunity to reject” this decision. Any plan that wanted to end its participation in the plan had to (a) pay a 5% surrender charge or (b) notify Principal and wait 12 months for its assets to be released. The Eighth Circuit held that this right to impose a penalty “impeded” the plan’s right to reject the credited interest rate change, making Principal an ERISA fiduciary when it set the credited interest rate.