17-0239-cv
Rosen v. Prudential Retirement Insurance and Annuity Company
UNITED STATES COURT OF APPEALS
FOR THE SECOND CIRCUIT
SUMMARY ORDER
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At a stated term of the United States Court of Appeals
for the Second Circuit, held at the Thurgood Marshall United
States Courthouse, 40 Foley Square, in the City of New York,
on the 11th day of October, two thousand seventeen.
PRESENT: DENNIS JACOBS,
JOSÉ A. CABRANES
RICHARD C. WESLEY,
Circuit Judges.
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Richard A. Rosen,
Plaintiff-Appellant,
-v.- 17-0239-cv
Prudential Retirement Insurance and
Annuity Company,
Defendants-Appellees.
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FOR APPELLANT: James E. Miller
Laurie Rubinow, Nathan C.
Zipperian
Shepherd, Finkelman, Miller &
Shah, LLP, Chester, Connecticut
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Monique Olivier
Duckworth Peters
Lebowitz Olivier LLP, San
Francisco, California
FOR APPELLEES: James T. Shearin
Pullman & Comley, Bridgeport,
Connecticut
Catherine M.A. Carroll
Kevin M. Lamb
Wilmer Cutler Pickering Hale and
Dorr LLP, Washington, DC
Appeal from a judgment of the United States District
Court for the District of Connecticut(Bolden, J.).
UPON DUE CONSIDERATION, IT IS HEREBY ORDERED, ADJUDGED
AND DECREED that the judgment of the district court be
AFFIRMED.
Richard Rosen appeals from the judgment of the United
States District Court for the District of Connecticut,
dismissing his ERISA complaint alleging breach of fiduciary
duty by the sponsor and administrator, service provider, and
investment advisor of the employer retirement plan in which
Rosen participates. We assume the parties’ familiarity with
the underlying facts, the procedural history, and the issues
presented for review.
Ferguson Enterprises (“Ferguson”), with the aid of
investment advisor CapFinancial Partners LLC
(“CapFinancial”), selected Prudential Bank & Trust FSB and
Prudential Retirement Insurance and Annuity Company
(together “Prudential”) as the service provider for its
401(k) plan (the “Plan”). Before appointing Prudential,
Ferguson and CapFinancial had agreed on the investment menu
and the terms that govern the management of Plan assets, and
arranged that Prudential would be compensated by fees paid
directly from the plans it manages or indirectly through
revenue-sharing arrangements entered into between Prudential
and the mutual funds.
Two investment vehicles are at issue.
! Prudential and Ferguson established the Ferguson
Enterprises, Inc. Retirement Savings Plan Trust
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(the “Trust”) by entering into the Trust
Agreement, which provides that Prudential is the
“directed trustee” responsible for holding,
managing, and investing the Trust “in accordance
with the directions of” Ferguson, and that
Prudential “shall take no action except pursuant
to directions received by it from [Ferguson], and
shall have no duty to determine any facts or the
propriety of any action taken or omitted by it in
good faith pursuant to instructions from
[Ferguson].”
! Prudential also entered into Group Annuity
Contracts (“GACs”) with the Plan to establish the
“Separate Accounts,” independent investment
options offered by the service provider that pool
and reinvest assets from multiple plans. See,
e.g., Leimkuehler v. Am. United Life Ins. Co., 713
F.3d 905, 908-09 (7th Cir. 2013). Ferguson
selects the Separate Accounts it will make
available to the Plan, but under the Separate
Account E Rider, Prudential has the power and sole
discretion to “invest [Separate Account] assets in
any investment that [it] deems to be permissible
under applicable law.”
Richard Rosen is a former employee of Ferguson who
participates in the Plan. He alleges that Prudential
engaged in prohibited transactions and breached its
fiduciary duties in violation of the Employee Retirement
Investment Savings Act (“ERISA”), 29 U.S.C. § 1104(a), by
receiving revenue-sharing payments from certain investment
options. Prudential moved to dismiss the complaint on the
ground that it was not acting in an ERISA fiduciary capacity
when it received any such payments. See 29 U.S.C. §
1002(21)(A) (defining “fiduciary”). In granting the motion,
the district court ruled that while Prudential may qualify
as a fiduciary with respect to the Separate Accounts, Rosen
failed to adequately plead a breach of fiduciary duty in his
Amended Complaint.
We review de novo the grant of a motion to dismiss.
McCarthy v. Dun & Bradstreet Corp., 482 F.3d 184, 191 (2d
Cir. 2007). In doing so “we accept as true all factual
statements alleged in the complaint and draw all reasonable
inferences in favor of the non-moving party.” Id. We “may
affirm on any basis for which there is sufficient support in
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the record, including grounds not relied on by the district
court.” Lotes Co., Ltd. v. Hon Hai Precision Indus. Co.,
753 F.3d 395, 413 (2d Cir. 2014)(internal quotation marks
omitted).
The “threshold question” in every case alleging breach
of fiduciary duty is whether the service provider “was
acting as a fiduciary . . . when taking the action subject
to [the] complaint.” Pegram v. Herdrich, 530 U.S. 211, 226
(2000). “[A] person is a fiduciary with respect to a plan
to the extent (i) he exercises any discretionary authority
or discretionary control respecting management of such plan
or ... (iii) he has any discretionary authority or
discretionary responsibility in the administration of such
plan.” 29 U.S.C. § 1002(21)(A)(i),(iii). “Subsection one
imposes fiduciary status on those who exercise discretionary
authority, regardless of whether such authority was ever
granted”; “[s]ubsection three describes those individuals
who have actually been granted discretionary authority,
regardless of whether such authority is ever exercised.”
Bouboulis v. Transp. Workers Union of Am., 442 F.3d 55, 63
(2d Cir. 2006)(internal quotation marks omitted); Frommert
v. Conkright, 433 F.3d 254, 271 (2d Cir. 2006) (an entity is
an ERISA fiduciary only to the extent that it “exercises ...
or has discretionary authority” over a plan’s management or
administration).
The ERISA definition is “functional,” so we look to the
actual discretionary authority held by the purported
fiduciary rather than its particular label or title.
LoPresti v. Terwilliger, 126 F.3d 34, 40 (2d Cir. 1997). In
the context of ERISA service providers, fiduciary status
attaches to the party empowered to make unilateral changes
to the investment menu by its contractual arrangement with
the plan. See Healthcare Strategies, Inc. v. ING Life Ins.
& Annuity Co., 961 F. Supp. 2d 393, 397-400 (D. Conn. 2013).
The initial, pre-contractual design of the investment menu
is not considered discretionary authority with respect to a
plan under ERISA. See F.H. Krear & Co. v. Nineteen Named
Trs., 810 F.2d 1250, 1259 (2d Cir. 1987); Pegram, 530 U.S.
at 225-26.
Prudential is considered a fiduciary only to the extent
that it exercises or possesses discretionary authority in
relation to a plan. Pegram, 530 U.S. at 225. Prudential
may therefore act in a fiduciary capacity with respect to
certain aspects of the plan and not others.
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The Trust. Prudential is not a fiduciary in its role
as directed trustee of the Trust assets. That agreement
specifically withholds from Prudential the sort of
discretionary responsibilities that create fiduciary status
under Section 1002(21)(A). See J. App’x at 22 (directing
Prudential to “take no action except pursuant to directions
received by it from” Ferguson); id. at 23 (Prudential “shall
have no duty or responsibility to determine the
appropriateness of any plan investment, or to cause such
investments to be changed”). The employer, Ferguson,
retains final contractual authority over any changes to the
funds available to the Trust. See Zang v. Paychex, Inc.,
728 F. Supp. 2d 261, 271 (W.D.N.Y. 2010) (service provider
not a fiduciary because contract gave employer final say and
veto over changes to fund allocation). Prudential does not
exercise or possess discretionary authority when it makes or
changes investments pursuant to Ferguson’s instructions.
Id. at 269. Nor does Prudential’s legal title to Trust
assets or its managerial ownership of them create the
independent discretion that is the touchstone of an ERISA
fiduciary analysis. See Beddall v. State St. Bank & Tr.
Co., 137 F.3d 12, 18 (1st Cir. 1998) (“mere exercise of
physical control generally ... is insufficient to confer
fiduciary status”).
The Separate Accounts. By contrast, Prudential
possesses at least some discretionary authority over
investments made in the Separate Accounts. See JA-139
(“[Prudential] will invest and reinvest Separate Account E
assets at its sole discretion”); 29 U.S.C. §
1002(21)(A)(iii). Prudential argues that it did not receive
revenue-sharing payments from any Separate Account
investments, and therefore could not have been “acting as a
fiduciary . . . when taking the action subject to [the]
complaint.” Pegram, 530 U.S. at 226; see also McCaffree
Fin. Corp. v. Principal Life Ins. Co., 65 F. Supp. 3d 653,
676 (S.D. Iowa 2014)(declining to find service provider a
fiduciary despite possession of discretionary authority
because alleged excessive fees did not arise out of
administration of separate accounts). However, district
court opinions in our circuit have held that the mere
possession of the discretion to make substantive changes to
investments within an account, even if such discretion is
never exercised, can transform Prudential into a fiduciary
with respect to those specific accounts. See Healthcare
Strategies, 961 F. Supp. 2d at 397, 399-400; Haddock v.
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Nationwide Fin. Servs., Inc., 262 F.R.D. 97, 122-25 (D.
Conn. 2009); Bouboulis, 442 F.3d at 63-65.1
In any event, the Amended Complaint fails because it
does not allege a breach with respect to the Separate
Accounts. In order to survive a motion to dismiss, Rosen
must plausibly allege that Prudential engaged in conduct
constituting a breach of an ERISA fiduciary duty while
acting within its capacity as plan fiduciary. 29 U.S.C. §
1104(a); Gearren v. The McGraw-Hill Comp., Inc., 660 F.3d
605 (2d Cir. 2011)(per curiam). “A claim has facial
plausibility when the plaintiff pleads factual content that
allows the court to draw a reasonable inference that the
defendant is liable for the misconduct alleged.” Ashcroft
v. Iqbal, 556 U.S. 662, 678 (2009) (internal citations
omitted). Plausibility requires “more than a sheer
possibility that a defendant has acted unlawfully,” and
“mere conclusory statements” do not suffice. Id.
The prohibited transactions alleged in the Amended
Complaint are the receipt of consideration in the form of
revenue-sharing payments. Fee-sharing arrangements between
service providers and third party managers “do not in-and-of
-themselves create a violation” of ERISA. Skin Pathology
Assocs., Inc. v. Morgan Stanley & Co., Inc., 27 F. Supp. 3d
371, 378 (S.D.N.Y. 2014). The Amended Complaint rehearses
the statutory definitions of prohibited transactions and
attaches them to allegations of unlawful revenue-sharing,
but such “threadbare recitals of the elements of a cause of
action, supported by mere conclusory statements, do not
suffice.” Harris v. Mills, 572 F.3d 66, 72 (2d Cir.
2009)(internal quotation marks omitted). Rosen does not
allege that Prudential received payments from the Separate
Accounts without Ferguson’s consent or knowledge, and does
not distinguish between ordinary compensation for services
in the form of revenue-sharing payments and illicit
kickbacks.
1
We recognize that cases in other circuits cited by
Prudential imposed additional requirements for fiduciary
status, but we are not bound by their decisions. See
Leimkuehler, 713 F.3d at 913; Santomenno ex rel John Hancock
Tr. v. John Hancock Life Ins. Co., 768 F.3d 284 (3d Cir.
2014)(plaintiff must establish a “nexus” between the alleged
basis for fiduciary responsibility and the wrongdoing
alleged in the complaint); McCaffree Fin. Corp., 65 F. Supp.
3d 653.
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Rosen’s allegations of a breach of the duties of
prudence and loyalty fare no better under our pleading
standard. Rosen adduces no facts to show that a prudent
fiduciary would have acted differently in managing the
Separate Accounts. Amgen, Inc. v. Harris, 136 S. Ct. 758,
759-60 (2016). He alleges that Prudential may hold a
financial interest adverse to plan participants when it
agrees to receive indirect payments from fund managers. But
such an arrangement, when disclosed and agreed upon by the
employer, is not per se improper. See Healthcare
Strategies, 961 F. Supp. 2d at 399; Harris Trust and Sav.
Bank v. John Hancock Mut. Life Ins. Co., 302 F.3d 18, 28-29
(2d Cir. 2002) (a service provider who adheres to the
agreed-upon terms of an employee retirement plan is not
bound to deviate from those terms against its own interests
simply because doing so could result in more gains to plan
participants). Even assuming Prudential could have been
paid less, an allegation that a service provider failed to
offer a lower fee investment option does not plausibly state
a claim for breach of the duty of prudence. Hecker v. Deere
& Co., 556 F.3d 575, 586 (7th Cir. 2009); Tibble v. Edison
Int’l, 729 F.3d 1110, 1135 (9th Cir. 2013).
Lastly, the Amended Complaint does not identify any
breaches of Prudential’s duty of loyalty. It alleges that
Prudential did not act “for the exclusive purpose of”
providing benefits to participants. J. App’x at 62. But
this theory simply tweaks Rosen’s other claims to sound in
disloyalty; to allege Prudential receives a benefit is the
same as to suggest it maintains financial incentives
separate from plan participants. These recycled allegations
cannot meet our pleading standard, which demands that to
“state a loyalty-based claim under [ERISA], a plaintiff must
do more than simply recast purported breaches of the duty of
prudence as disloyal acts”. Sacerdote v. NYU, No. 16-cv-
6284 (KBF), 2017 WL 3701482, at *5 (S.D.N.Y. Aug. 25, 2017).
Most importantly, the loyalty-based allegations that the
revenue-sharing payments were “fraudulently and deceptively
concealed” are contradicted by documents incorporated into
the Amended Complaint. J. App’x at 54-55. Rosen’s protests
that the disclosures were convoluted or unclear are not
legally cognizable arguments. See Brown v. Owens Corning
Inv. Review Comm., 622 F.3d 564, 571 (6th Cir. 2010)(“Actual
knowledge does not require proof that the individual
Plaintiffs actually saw or read the documents that disclosed
the allegedly harmful investments”)(internal citations
omitted).
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For the foregoing reasons, and finding no merit in
Rosen’s other arguments, we hereby AFFIRM the judgment of
the district court.
FOR THE COURT:
CATHERINE O’HAGAN WOLFE, CLERK
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