By Cyril Tuohy
A federal appeals court has upheld a lower court’s ruling in favor of an insurance carrier that paid out $151,000 in death benefits through a retained asset account (RAA).
Thomas W. Vander Luitgaren sued Sun Life Assurance Company of Canada and its parent, Sun Life Financial, on the grounds that paying the benefits through such an account was an act of self-dealing in retirement plan assets.
Vander Luitgaren, who became the beneficiary of the assets after the death of his brother, also claimed that the insurance carrier wasn’t acting in his best interest, and that the insurer was in violation of its fiduciary duties under the Employee Retirement Income Security Act.
In its decision last month, the U.S. Court of Appeals for the First Circuit said the court had recently decided a similar case in Merrimon v. Unum Life Insurance Co.
In that case, an insurer, “acting in the place and stead of a plan administrator, properly discharges its duties under the Employee Retirement Income Security Act, when it pays a death benefit by establishing a retained asset account,” the court ruled.
The Merrimon and Vander Luitgaren cases are “cut from the same cloth,” the appeals court ruled in a 12-page decision.
In Merrimon, “We premised this holding on the principle that the assets of a policy-issuing insurer are not plan assets, and are not transformed into plan assets by the establishment of an RAA,” the appeals court ruled.
The court’s conclusions in Merrimon “apply unreservedly” in the instance of Vander Luitgaren, the appeals panel wrote.
Unlike Merrimon, which stipulated how the death benefit payments were to be paid, Sun Life gave itself discretion as to the means of payment, which was allowed under the terms of the plan. Sun Life chose to use the retained asset account.
“We do not believe that a legally significant difference exists where, as here, the Plan documents, instead of singling out RAAs as the exclusive method of payment, allowed the insurer to pay other than by a lump sum,” the court wrote.
“ERISA section 404(a) does not require a fiduciary to don the commercial equivalent of sackcloth and ashes,” the court wrote. “The short of it is that, in the circumstances presented here, Sun Life’s choice to pay by means of an RAA did not violate its fiduciary duties.”
Vander Luitgaren was eventually paid $151,000 in death benefits and $74 in interest, according to court documents.
Cyril Tuohy is a writer based in Pennsylvania. He has covered the financial services industry for more than 15 years. Cyril may be reached at [email protected].
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