Service provider was not fiduciary subject to liability for allegedly excessive fees assessed plan participants

A service provider did not violate ERISA by charging plan participants an allegedly excessive fee for reviewing domestic relations orders, as it was not a fiduciary at the time the fee structure was negotiated with the plan sponsor, according to the U.S. Court of Appeals in Philadelphia (CA-3).

Negotiated fee schedule for DRO review

The Great Atlantic and Pacific Tea Company (A&P) and Fidelity Management Trust Company and Fidelity Investments Institutional Operations Company (Fidelity) negotiated a trust agreement under which Fidelity agreed to provide recordkeeping and administrative services for the A&P 401(k) plan. Included in the services to be provided by Fidelity was the review of domestic relations orders (DROs) to ensure compliance with ERISA and the terms of the plan.

The trust agreement listed the fixed fees that would be charged to plan participants for the DRO review services. The fees ranged from $300 for web review of a defined contribution order generated on the Fidelity Web Site, to $1200 for manual review of one defined contribution plan included in a DRO that was not generated on the Fidelity Web Site, to $1800 for manual review of a combination of two or more defined contribution plans mentioned in a DRO that was not generated on the Fidelity Web Site.

A plan participant who did not use a DRO generated on the Fidelity Web Site, but submitted a DRO prepared by an outside firm, brought suit, alleging that the $1200 he was charged for a DRO review was unreasonable and violated ERISA. Specifically, the participant alleged that Fidelity breached its fiduciary and co-fiduciary obligations and participated in a prohibited transaction. A federal trial court dismissed the action for failure to state a claim.

Breach of fiduciary duty

The participant alleged that Fidelity breached its fiduciary duty to plan participants by: (1) entering into an agreement to charge allegedly excessive fees and (2) collecting such fees. The Appeals Court, however, ruled that Fidelity, at the point it was negotiating fees with A&P was not a fiduciary of the plan and, thus, owed no duty to plan participants to defray the reasonable expenses of administering the plan. The court conceded that, at the point in time when Fidelity actually charged fees for reviewing DROs, it did have a fiduciary duty to the plan and its participants with respect to the administration of services. However, the court explained, Fidelity did not control the fee structure or have unilateral discretion to change the fee arrangement that was set forth in the agreement. Accordingly, Fidelity could not be held liable as a fiduciary for the allegedly excessive fee schedule.

Prohibited transactions

The participant further asserted that Fidelity was a party in interest who received plan assets in violation of ERISA §406(a). The court, however, concluded that Fidelity was not a party in interest at the time the trust agreement was signed. While Fidelity became a party in interest when it began providing services to the plan, it was not a fiduciary when the agreement was signed, the court explained. Accordingly, the agreement did not constitute a prohibited transaction.

Source: Danza v. Fidelity Management Trust Company (CA-3).

For more information on this and related topics, consult the CCH Pension Plan Guide, CCH Employee Benefits Management, and Spencer’s Benefits Reports.

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