In January 2017, Markham established an employee pension benefit plan for his family dental practice, for which he serves the Plan’s sponsor, administrator, and named fiduciary. Variable Annuity Life Insurance Company specializes in tax-qualified retirement plans. In May 2018, Markham hired Variable to maintain the Plan on Variable’s retirement platform. Markham selected the Portfolio Director Group Fixed and Variable Deferred Annuity Contract as the Plan’s annuity contract, under which Variable served as the issuer and contract record-keeper of the Plan’s assets. Variable charged various fees for its services, including an Annual Administrative Service Fee between $2,500 and $12,000. The PD Contract also provided for a 5% surrender fee on transfers out of the contract for funds contributed in the previous 60 months.
In January 2020, Markham became dissatisfied with Variable’s services and notified Variable that it intended to terminate the PD Contract. The parties engaged in several months of discussion regarding the termination, and Variable informed Markham that the 5% surrender charge would apply to all of the Plan’s assets.
Markham and the Plan initiated a putative class action alleging Variable violated ERISA by (1) breaching its fiduciary duties and (2) engaging in a prohibited transaction with a party-in-interest. The District Court dismissed the action, and the U.S. Fifth Circuit Court of Appeals affirmed.
“We have not previously addressed whether the acceptance of previously bargained-for compensation constitutes a fiduciary act under ERISA. Plaintiffs argue Variable acted as a fiduciary because it had ‘unlimited discretion’ over the surrender fee and used such discretion when it declined to waive the fee. But the notion that a party’s right to waive payment makes it a fiduciary is inconsistent with the reality that any private entity or person can always decline or reduce a payment owed to them under a contract; indeed, it makes little sense to suggest that any private entity, including a fiduciary, must demand all sums allowed by the contract.” After discussing some of the caselaw, the Court concluded that: “we join the majority of circuits in holding that the collection of a contractually predetermined fixed fee does not constitute a fiduciary act under ERISA.”
With respect to the prohibited transaction claim: “Plaintiffs and amicus curiae, the Secretary of Labor, argue that a person ‘providing services to such plan’ under 29 U.S.C. §1002(14)(B) includes all service providers, regardless of whether they have begun providing services to the particular plan at issue. But this interpretation contradicts the plain reading of the text. The word ‘providing’, used here as a present participle, most commonly describes a person who is currently providing services. Further, the modifying phrase ‘to such plan’ limits the definition to entities providing services to the plan at issue – not service providers in general. he Secretary relies on 34 U.S.C. §12421(3) to argue that ‘providing’ does not require a preexisting relationship. This statute denotes proper recipients of grants such as ‘proposals providing services to culturally specific and underserved populations.’ 34 U.S.C. §12421(3). But the use of ‘proposals’ denotes future use, referring to proposals that intend to provide services. No such terminology is included in 29 U.S.C. §1002(14)(B). Thus, entities that are not already providing services to a particular plan at the time of contracting with that plan, such as Variable with respect to the Markham Plan, are not ‘parties in interest’ under ERISA.”
D.L. Markham DDS 401(k) Plan v. Variable Annuity Life Ins. Co., 88 F.4th 602 (5th Cir. 2023).