NOT PRECEDENTIAL
UNITED STATES COURT OF APPEALS
FOR THE THIRD CIRCUIT
______________
No. 12-3497
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NICHOLAS DANZA, individually and on behalf of defined contribution plans that used
Defendants as their qualified domestic relations order service provider and all similarly
situated beneficiaries of such ERISA-covered employee benefit plans,
Appellant
v.
FIDELITY MANAGEMENT TRUST COMPANY; FIDELITY INVESTMENTS
INSTITUTIONAL OPERATIONS COMPANY INC.
______________
APPEAL FROM THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF NEW JERSEY
(D.C. Civ. Action No. 1-11-cv-02893)
District Judge: Honorable Joseph E. Irenas
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Submitted Under Third Circuit L.A.R. 34.1(a)
July 16, 2013
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Before: RENDELL, SMITH, and SHWARTZ, Circuit Judges
(Opinion Filed: July 29, 2013)
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OPINION
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SHWARTZ, Circuit Judge.
I. INTRODUCTION
Plaintiff Nicholas Danza brought suit on behalf of himself and other similarly
situated beneficiaries of employee benefit plans against Defendants Fidelity Management
Trust Company and Fidelity Investments Institutional Operations Company (collectively,
“Fidelity”) alleging that they violated various provisions of the Employee Retirement
Income Security Act of 1974, as amended (“ERISA”), by charging participants an
excessive service fee for reviewing Domestic Relations Orders (“DROs”). Plaintiff
argues that the District Court erred in granting Defendants’ motion to dismiss. For the
reasons set forth below, we will affirm.
II. FACTS AND PROCEDURAL HISTORY
As we write principally for the benefit of the parties, we recite only the essential
facts and procedural history. Plaintiff was a participant in a 401(k) retirement plan
sponsored by his employer, the Great Atlantic & Pacific Tea Company, Inc. (“A&P”). In
2008, A&P and Fidelity entered into a Trust Agreement under which Fidelity agreed to
provide recordkeeping and administrative services for the Great Atlantic & Pacific Tea
Company, Inc. Savings Plan (“A&P Plan”), which included the review of DROs for
compliance with ERISA and the members’ plan.1 Schedule B of the Trust Agreement
1
Generally, a 401(k) plan participant may not assign his or her plan retirement
savings to another person, but ERISA provides an exception in cases of divorce as long
as the assignment is made by a DRO that satisfies specific statutory and plan
requirements. See 29 U.S.C. § 1056(d)(1), (3). Plan administrators must review DROs
to ensure that they satisfy these requirements. Some plan administrators hire service
providers to perform this compliance review. Pursuant to the agreement here, A&P hired
Fidelity as a service provider to configure an online method to create a qualified DRO,
develop administrative guidelines for determining whether a DRO is qualified, respond to
inquiries, and review DROs to determine if they comply with Section 414(p) of the
Internal Revenue Code.
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listed the fees that Fidelity would charge for its services, including the following fixed
fees for DRO services to be paid by plan participants:
• $300 for the web review of a defined contribution Order generated
on the [Fidelity] Web site and not materially altered.
• $1,200 for the manual review of one defined contribution plan
mentioned in [a DRO] . . . [that] was not generated on the [Fidelity]
Web site or was generated on the Web site, but materially altered.
• $1,800 for the manual review of a combination of any two or more
defined contribution plans mentioned in [a DRO] . . . [that] was not
generated on the [Fidelity] Web site or was generated on the Web
site, but materially altered.
App. 192. Plaintiff did not use a DRO generated on the Fidelity website. Rather, he
submitted a DRO that an outside firm had prepared. Pursuant to the Trust Agreement, he
was charged $1,200 for its review. Plaintiff claims the fee is unreasonable and violates
ERISA. His eight-count complaint alleges breach of fiduciary duty under ERISA Section
404(a) (Count I), breach of fiduciary duty by a co-fiduciary under ERISA Section 405(a)
(Counts II-III), and participation in prohibited transactions under ERISA Sections 406(a)
and (b) (Counts IV-VIII). The District Court granted Defendants’ Rule 12(b)(6) motion
to dismiss for failure to state a claim. This appeal followed.
III. JURISDICTION AND STANDARD OF REVIEW
The District Court had jurisdiction over this case pursuant to 28 U.S.C. § 1331 and
29 U.S.C. § 1132(e) and (f). We have jurisdiction over this appeal pursuant to 28 U.S.C.
§ 1291. We exercise plenary review of an order granting a motion to dismiss and apply
the same standard as the District Court. See Santomenno v. John Hancock Life Ins. Co.,
677 F.3d 178, 182 (3d Cir. 2012). When considering a motion to dismiss, we must
determine whether the complaint “contain[s] sufficient factual matter, accepted as true, to
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‘state a claim to relief that is plausible on its face.’” Ashcroft v. Iqbal, 556 U.S. 662, 678
(2009) (quoting Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570 (2007)). “A claim has
facial plausibility when the Plaintiff pleads factual content[, which is assumed to be true,]
that allows the court to draw the reasonable inference that the defendant is liable for the
misconduct alleged.” Id.
IV. DISCUSSION
Plaintiff asserts that Fidelity violated ERISA by entering into an agreement to
charge allegedly excessive fees and for collecting such fees. Thus, to determine if
Plaintiff properly alleges violations of ERISA, Fidelity’s conduct must be examined at
two points: when it was negotiating for the fees and when it was collecting the fees.
A. Breach of Fiduciary Duty
Plaintiff asserts a claim under ERISA Section 404(a), which prohibits breaches of
fiduciary duty by plan fiduciaries. Under ERISA Section 3(21)(A), “a person is a
fiduciary with respect to a plan to the extent . . . [he] exercises any authority or control
respecting management or disposition of its assets . . . or . . . he has any discretionary
authority or discretionary responsibility in the administration of such plan.” 29 U.S.C. §
1002(21)(A). Under Section 404(a), “a fiduciary shall discharge his duties with respect
to a plan solely in the interest of the participants and beneficiaries and . . . for the
exclusive purpose of . . . defraying reasonable expenses of administering the plan . . . .”
29 U.S.C. § 1104(a)(1)(A)(ii). Section 404 in essence codifies a common law fiduciary’s
general duty of loyalty—the duty of a trustee to administer the trust solely in the interest
of the beneficiaries. See Pegram v. Herdrich, 530 U.S. 211, 224 (2000); In re Unisys
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Corp. Retiree Med. Benefits ERISA Litig., 579 F.3d 220, 227-228 (3d Cir. 2009). A
person or entity may be deemed a fiduciary for certain purposes but not others. Thus, in
the case of service providers, like Fidelity in this case, “the threshold question is not
whether the actions of some person employed to provide services under a plan adversely
affected a plan beneficiary’s interest, but whether that person was acting as a fiduciary
(that is, was performing a fiduciary function) when taking the action subject to
complaint.” Pegram, 530 U.S. at 225, 226.
Our decision in Renfro v. Unisys Corp., 671 F.3d 314 (3d Cir. 2011), provides an
example. In Renfro, a plaintiff claimed that a fiduciary breached its duty by allegedly
charging unreasonably high fees for its services managing investments in mutual funds
that were available to plan participants. Id. at 318-19. Although the Renfro defendant
was a fiduciary for some purposes—i.e., the management of the investments—it was not
a fiduciary with respect to the charging of its fees because it lacked “discretionary
control” over “the particular activity in question,” which was the original decision by the
plan sponsor to include those investment options with those fees in the plan. Id. at 321
(internal citations omitted).
Here, at the point that Fidelity was negotiating its fees with A&P, it was not a
fiduciary of the plan and owed no duty to the plan participants to “defray[] reasonable
expenses of administering the plan.” 29 U.S.C. § 1104(a)(1)(A)(ii). It was simply
engaging in an arms-length negotiation for a contract to provide services. Thus, the
District Court correctly concluded that Fidelity was not a fiduciary at that time and so it
had no fiduciary duty to Plaintiff that could have been breached.
5
At the point in time when Fidelity actually charged the fee for reviewing a DRO,
Fidelity did have a fiduciary duty to the A&P Plan and its participants with respect to the
administration of those services, but it did not then control the fee structure, as it was set
in the agreement with A&P and Fidelity did not have unilateral discretion to change it. 2
Renfro, 671 F.3d at 324 (quoting Hecker v. Deere & Co., 556 F.3d 575, 583 (7th Cir.
2009)) (Defendant “‘[did] not act as a fiduciary with respect to the terms in the service
agreement if it did not control the named fiduciary’s negotiation and approval of those
terms.’”); see also Chi. Dist. Council of Carpenters Welfare Fund v. Caremark, Inc., 474
F.3d 463, 472-73 n.4 (7th Cir. 2007) (holding that defendant was not a fiduciary with
respect to a fixed fee that was set by an agreement negotiated at arm’s length).
Therefore, Fidelity cannot be held liable as a fiduciary for the challenged conduct, and
Plaintiff’s Section 404(a) claim fails.
B. Breach of Fiduciary Duty by a Co-Fiduciary
Plaintiff next asserts claims under ERISA Section 405(a), which holds co-
fiduciaries liable for the breaches of other fiduciaries if they knowingly participate in that
breach or have knowledge of that breach and do not make reasonable efforts under the
circumstances to remedy the breach. 29 U.S.C. § 1105(a)(1), (3).
Under ERISA, fiduciaries “[may] not avoid liability for . . . mismanagement of the
[p]lan by simply doing nothing,” Free v. Briody, 732 F.2d 1331, 1336 (7th Cir. 1984),
and therefore Section 405 encourages fiduciaries, “as a means of avoiding personal
2
Notably, the fee was predetermined, and the amount charged was based on how
the participant prepared the DRO.
6
liability, to take steps to remedy perceived improprieties in plans operations.” Nicolaou
v. Horizon Media, Inc., 402 F.3d 325, 331 (2d Cir. 2005) (Pooler, J., concurring). Here,
Plaintiff argues that A&P breached its fiduciary duty to defray costs by agreeing to the
$1,200 fee and signing the Trust Agreement, and Fidelity, as another fiduciary of the
A&P plan who was aware of A&P’s breach, is liable. Once again, we look to whether
Fidelity was a fiduciary when the alleged breach by another fiduciary occurred. In
Renfro, we found that the defendant service provider could not be a co-fiduciary under
ERISA Section 405 for the plan sponsor’s alleged breach—the decision to include certain
mutual funds and their accompanying fees—because the defendant then “owe[d] no
fiduciary duty with respect to the negotiation of its fee compensation” as it “was not yet a
plan fiduciary at the time it negotiated the fee compensation with [the plan sponsor].”
Renfro, 671 F.3d at 324.
Similarly, based on Plaintiff’s allegations, at the time that A&P and Fidelity
negotiated and signed the Trust Agreement, Fidelity was just an arms-length negotiator
who owed no duty to plan participants. Hence, Fidelity was not then a fiduciary and
therefore could not be considered a co-fiduciary under Section 405. When Fidelity later
became a fiduciary, it was only a fiduciary with respect to its administration of plan
services, not with respect to the challenged conduct of A&P approving Fidelity’s
collection of a particular fee. Because Fidelity cannot be held liable as a co-fiduciary,
Plaintiff’s Section 405(a) claims fail.
C. Involvement in Prohibited Transactions
7
Plaintiff also asserts claims under two provisions of Section 406, which prohibit
certain transactions that “generally involve uses of plan assets that are potentially harmful
to the plan.” Lockheed Corp. v. Spink, 517 U.S. 882, 893 (1996).
Section 406(a) prohibits transactions between the plan and a party in interest. The
relevant portion of the statute provides:
Except as provided in section 1108 of this title, . . . a
fiduciary with respect to a plan shall not cause the plan to
engage in a transaction, if he knows or should know that
such transaction constitutes a direct or indirect . . .
furnishing of goods, services, or facilities between the plan
and a party in interest [or] transfer to, or use by or for the
benefit of a party in interest, of any assets of the plan . . ..
29 U.S.C. § 1106(a)(1)(C),(D). A “party in interest” includes insiders to a plan, such as
fiduciaries, employers, employees, service providers, and certain stockholders. 29
U.S.C. § 1002(14). Prohibited Section 406(a) transactions between a plan and a party in
interest are those “commercial bargains that present a special risk of plan underfunding
because they are struck with plan insiders, presumably not at arm’s length.” Lockheed,
517 U.S. at 893. A party in interest can be held liable for Section 406(a) transactions and
be required to disgorge its profits under the remedy provisions of Section 502(a)(3).
Harris Trust & Sav. Bank v. Salomon Smith Barney, Inc., 530 U.S. 238, 242-43, 245-249
(2000) (holding that a defendant who provided broker-dealer services to a plan was a
party in interest, required to disgorge his profits after the plan fiduciary caused the plan to
buy worthless motel properties from him as that was a Section 406(a) prohibited
transaction given his insider status). To obtain that remedy, however, Plaintiff must first
8
allege that Fidelity is a party in interest that engaged in one of the statutorily prohibited
transactions.
Here, Plaintiff argues that a statutorily prohibited transaction occurred when A&P
as a fiduciary caused the plan to hire and pay Fidelity, who was a party in interest, that
would result in both a direct furnishing of services between the plan and a party in
interest and a transfer of plan assets to a party in interest under Section 406(a). Fidelity,
however, was not a party in interest at the time the Trust Agreement was signed.3 While
Fidelity is currently a party in interest as a service provider to the plan, it was not
“providing services” and was not a fiduciary when the Trust Agreement was signed, so
that transaction did not fall within a prohibited category.
Moreover, “Congress defined ‘party in interest’ to encompass those entities that a
fiduciary might be inclined to favor at the expense of the plan’s beneficiaries.” Harris
Trust, 530 U.S. at 242. Here, there is no allegation that A&P had a prior relationship
with Fidelity and there is no fact from which this Court could infer that they showed
favoritism to each other or did anything other than engage in arms-length negotiation.
Negotiation between such unaffiliated parties does not fall into the category of
transactions that Section 406(a) was meant to prevent. Lockheed, 517 U.S. at 893.4
3
At the time that Fidelity was collecting the fee under the terms of the Trust
Agreement, it was both a fiduciary of the plan and a party in interest, but its conduct in
causing the plan to pay the fee for its own benefit cannot trigger liability under ERISA
Section 406(a) because this section deals with transactions between two distinct parties.
Self-dealing transactions are addressed by ERISA Section 406(b), which we discuss
herein.
4
ERISA Section 408 provides certain exceptions to Section 406(a) prohibited
transactions, 29 U.S.C. § 1108(b), but we need not address whether an exception applies
9
We next turn to Section 406(b), which prohibits certain transactions between the
plan and a fiduciary. Of relevance here is the portion of the statute that reads “[a]
fiduciary with respect to a plan shall not . . . deal with the assets of the plan in his own
interest or for his own account . . . .” 29 U.S.C. § 1106(b)(1). Section 406(b)’s purpose
is to “prevent[ ] a fiduciary from being put in a position where he has dual loyalties and,
therefore, he cannot act exclusively for the benefit of a plan's participants and
beneficiaries.” Reich v. Compton, 57 F.3d 270, 287 (3d Cir. 1995) (internal citation
omitted). Here, Plaintiff argues that Fidelity’s act causing the plan to disburse $1,200 of
plan assets to itself as compensation for the DRO review constitutes a prohibited
transaction because it was a fiduciary at the time of the disbursement.
As previously discussed, Fidelity was a fiduciary only for purposes of
administering the plan, not for purposes of negotiating or collecting its compensation. At
the time of the disbursement, the fee structure was set and Fidelity lacked discretion to
change it. What differentiates this case from cases in which we have held that Section
406(b) applied is the fact that Fidelity, at the time it collected the fee, had no actual
control or discretion over the transaction at issue5 —the price of the previously
bargained-for fees.
here, as we do not find that the allegations describe a prohibited Section 406(a)
transaction.
5
For example, 406(b) has been found to prohibit transactions involving kick-backs
to fiduciaries and self-negotiated loans. See, e.g., Nat’l Sec. Systems, Inc. v. Iola, 700
F.3d 65, 91-93 (3d Cir. 2012) (holding that a fiduciary who receives consideration in
connection with a transaction involving plan assets violated Section 406(b), and a non-
fiduciary who facilitated that transaction could be liable); Reich, 57 F.3d at 287, 289-290
(holding that a plan trustee who essentially negotiated on both sides of a mortgage
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Plaintiff points out that while there are exceptions to Section 406(a) prohibited
transactions under Section 408, there are no exceptions to Section 406(b) prohibited
transactions. Thus, Plaintiff argues that even if the fees are reasonable, the disbursement
of any fees by the fiduciary to pay itself for its services is prohibited. This argument goes
too far. Section 406(b)’s purpose is to prohibit transactions that might involve self-
dealing by a fiduciary, not to prevent fiduciaries from being paid for their work. A
service provider cannot be held liable for merely accepting previously bargained-for
fixed compensation that was not prohibited at the time of the bargain. See Chi. Dist.
Council of Carpenters Welfare Fund, 474 F.3d at 472 n.4 (holding that a service provider
who accepted compensation prescribed by an arms-length agreement was not a fiduciary
for compensation purposes and therefore not liable under Section 406(b)); Schulist v.
Blue Cross of Iowa, 717 F.2d 1127, 1131 (7th Cir. 1983) (holding that Section 406(b)
only governs a defendant service provider who was receiving agreed-upon rates directly
from a plan if that defendant had discretionary authority or control with respect to the
rates agreed to by the plan sponsor).6
In short, ERISA prohibits none of the alleged transactions, and thus Plaintiff’s
Section 406 claims fail.
transaction with the plan violated Section 406(b)); Cutaiar v. Marshall, 590 F.2d 523, 530
(3d Cir. 1979) (holding that a transfer between two funds where the trustees are identical
but participants and beneficiaries are not violates Section 406(b)).
6
Cf. Sixty-Five Sec. Plan v. Blue Cross and Blue Shield of Greater New York,
583 F. Supp. 380, 388 (S.D.N.Y.), reargument denied 588 F. Supp. 119, 120 (S.D.N.Y.
1984) (finding an impermissible conflict of interest under ERISA where a service
provider had full discretion to grant or deny insurance claims, and the provider’s fee was
based upon a percentage of any claims it granted).
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V. CONCLUSION
For the foregoing reasons, we will affirm the District Court’s order granting the
motion to dismiss.
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