By Cyril Tuohy
A U.S. appeals court has upheld a lower court’s dismissal of a lawsuit against John Hancock, which was sued for charging too much for the sale and management of group annuity contracts to retirement plan participants.
The three-judge panel of the U.S. Court of Appeals for the Third Circuit in Philadelphia said the plan participants failed to show that John Hancock was an investment advice fiduciary under the Employee Retirement Income Security Act (ERISA) and the Investment Company Act of 1940.
A lower court had already granted a motion by John Hancock to dismiss the case after finding that the company was not a fiduciary with respect to the alleged breaches involving maintenance, sales and service fees and 12b-1 mutual fund fees.
In its 30-page decision, the appeals court said that whether the fees were excessive wasn’t the real issue, but rather “the question is whether John Hancock acted as a fiduciary to the plan with respect to the fees that it set.”
The appeals court also said that John Hancock’s responsibilities were not to plan participants, but rather to the trustees of the defined contribution retirement plans and with whom John Hancock, a service provider, entered into an agreement.
“This makes sense: when a service provider and a plan trustee negotiate at arm’s length over the terms of their agreement, discretionary control over plan management lies not with the service provider but with the trustee, who decides whether to agree to the service provider’s terms,” the court found.
Under the contract terms, John Hancock’s product feature known as a “Fiduciary Standards Warranty,” states that the company is not a fiduciary, the court said.
Similar cases have set a precedent for this ruling, the court said: Hecker v. Deere & Co. in 2009 and Renfro v. Unisys in 2011. Citing Renfro, the appeals court said the issue is whether John Hancock is a fiduciary “with respect to the particular activity in question.”
The plan participants’ argument that John Hancock became a fiduciary by monitoring the performance of investment options was also dismissed.
The court said it did not see how John Hancock’s monitoring of investment performance, retaining the right to change investment options and alter the fees that it charged “gives John Hancock discretionary control over anything, much less management of the plans.”
The case, titled Santomenno v. John Hancock Life Insurance Co., began in March 2010, when participants enrolled in the J&H Berge 401(k) profit-sharing plan and the Scibal Associates 401(k) plan sued John Hancock Life Insurance, John Hancock Investment Management Services, John Hancock Funds and John Hancock Distributors.
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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