Court Finds That Rollover Solicitations to ERISA Plan Participants Are Not Fiduciary

The question of whether a financial institution’s sales practices that encourage retirement plan participants to roll their retirement plan account balances into individual financial products (such as IRAs) that generate fees for the financial institution are subject to ERISA’s fiduciary duties has been a hot topic for financial institutions in recent years, especially since the Department of Labor (DOL) changed its position on the question in 2020 to a restrictive view that resulted in the revamping of many business models. On September 27, 2022, the Federal District Court for the Southern District of New York rejected claims that TIAA-CREF acted as an ERISA fiduciary in connection with soliciting, as part of a sales campaign, participants in employer-sponsored retirement plans for which TIAA-CREF served as recordkeeper to roll their balances out of the plans and into individual, fee-paying TIAA-CREF products.¹ While the case deals with events that occurred prior to the DOL’s most recent pronouncements, the decision provides a lengthy, fully reasoned analysis of ERISA’s governing statutory and regulatory provisions and may affect how courts assess both current conduct and DOL’s restrictive position.

Brief Background

Whether or not a financial institution is acting as an ERISA fiduciary in connection with a rollover solicitation is a key question since ERISA fiduciaries are held to a high standard and, as a general matter, are prohibited from acting in their own interest. Longstanding DOL regulations provide that a person is a fiduciary on account of providing investment advice only if a five-part test is satisfied. Under the five-part test for advice to be fiduciary, the advice must be (i) individualized, (ii) provided on a regular basis, (iii) provided pursuant to a mutual agreement or understanding, (iv) the primary basis for the investment decision, and (v) provided for a fee. While there are other ways to be a fiduciary under ERISA, the argument that a financial institution is providing “investment advice” in connection with a solicited rollover is the theory for fiduciary status most commonly pointed to in this context.

Before the “Fiduciary Rule.” In 2005, DOL issued Advisory Opinion 2005-23A (the Deseret Letter), in which DOL took the position that rollover solicitations do not constitute “investment advice” in most cases. In light of this guidance, along with the fact that rollover solicitation was typically conducted one-off rather than “on a regular basis,” the marketplace generally treated rollover solicitation as a non-fiduciary activity.

Fiduciary Rule and After. In connection with proposing and promulgating the ill-fated “fiduciary rule” that was ultimately struck down by the courts in 2018, it became clear that DOL staff desired to change rollover solicitation into an ERISA fiduciary function in most cases. Subsequently, DOL utilized the preambles to Prohibited Transaction Exemption 2020-02 (see our Advisories here and here) to withdraw the Deseret Letter and announce a change of its position. In a nutshell, DOL’s new position on rollover solicitation is that (i) in many cases, rollover solicitations involve fiduciary investment advice for a fee and (ii) the “regular basis” prong of the five-part test may be satisfied in cases where the rollover solicitation marks the commencement of an ongoing relationship between the individual participant being solicited for the rollover and the soliciting financial institution (i.e., “regular basis” may be inferred from an expected future, regular relationship between the former plan participant and the soliciting financial institution) (the PTE 2020-02 Position).

Relevant Facts

Like many financial institutions, TIAA-CREF provided recordkeeping services to numerous ERISA-covered retirement plans. TIAA-CREF also offered financial products to individual customers for a fee and had issued public marketing materials stating that it met a “fiduciary” standard when providing investment recommendations. The plaintiffs alleged that TIAA-CREF used its access to client plan records to target, and then approach, client plan participants (especially ones with large accounts) about the prospect of rolling over their plan accounts to individual TIAA-CREF products that paid higher fees to TIAA-CREF. Notably, the litigation only dealt with actions which occurred prior to DOL’s change of position and withdrawal of the Deseret Letter.

Certain Key Issues Addressed by the Court

1. Was TIAA-CREF Necessarily a Fiduciary Because TIAA-CREF’s Marketing Materials Stated That TIAA-CREF Met a “Fiduciary” Standard?

• No, TIAA-CREF was not precluded by its general marketing statement from arguing to the court (and prevailing on the point) that it was not a fiduciary. This somewhat surprising holding is particularly helpful to financial institutions that may have made broad statements in general marketing materials.

2. For Periods Before DOL’s Withdrawal of the Deseret Letter, Should the Deseret Letter or the DOL’s PTE 2020-02 Position Apply to Rollover Solicitations?

• Neither. Rather, the court chose to apply the five-part test de novo.

3. Under the Five-Part Test, Were TIAA-CREF’s Rollover Solicitations Enough to Make It a Fiduciary Under ERISA?

• No. The court stated that it “does not find that TIAA’s limited recommendations to Plaintiffs to engage in a one-time transaction constitutes advice on a ‘regular basis’ under ‘the language of the statute and regulation. . .’”

4. Did the Court Agree With DOL’s PTE 2020-02 Position That the Future Relationship of the Parties May Be Taken Into Account for Purposes of Establishing a “Regular Basis”?

• No. The court was troubled by DOL’s position that, for purposes of applying the five-part test, “the nature of the relationship after assets have been rolled out of the plan and into an IRA” may be taken into account and expressly stated that “[t]he Court’s own analysis would not arrive at the same conclusion.”

5. Did TIAA-CREF Use “Plan Assets” When it Utilized Plan Records to Identify Which Participants to Target for Rollovers?

• No. The court held, consistent with several other recent decisions, that plan data is not a “plan asset” under ERISA. This issue arose in this case in connection with an argument by plaintiffs that TIAA-CREF should be treated as a fiduciary on account of controlling “plan assets” when it used client plan data to target participants for rollovers. However, the question of whether plan data is a “plan asset” is important to financial institutions because, if plan data were found to be a “plan asset,” any use of such data by a financial institution for its own purposes would have to be analyzed under ERISA’s highly restrictive prohibited transaction rules.

Application to Rollover Solicitations After the Effective Date of PTE 2020-02

The court did not have to determine what the result would have been if the rollover solicitations had occurred after the effective date of PTE 2020-02 and did not do so. The court expressed “no opinion as to whether, taking into account the deference it may afford the DOL’s interpretation when analyzing post-2020 guidance conduct, it would reach the same conclusion.” Financial institutions that engage, or are considering engaging, in rollover solicitations will want to consider the impact of this decision and follow any appeal.

© Arnold & Porter Kaye Scholer LLP 2022 All Rights Reserved. This Advisory is intended to be a general summary of the law and does not constitute legal advice. You should consult with counsel to determine applicable legal requirements in a specific fact situation.