In Romano v. John Hancock Life Insurance, 120 F.4th 729 (Oct. 30, 2024), the Eleventh Circuit held that an insurance company providing investment and record keeping services is not an ERISA fiduciary as it relates to the application and retention of foreign tax credits.
John Hancock provided investment and recordkeeping services to 401(k) retirement plans, including the plan established by the Romanos for their law firm. The Romano Law Plan did not make direct investments but made contributions into a “separate account” segregated from John Hancock’s general funds. The separate account was divided into sub-accounts established, administered, owned, and managed by John Hancock, which was the legal and taxable owner of the assets in the separate accounts. The group annuity contract stated that “by availing the Plan and its participants of its platform of investments and by providing record-keeping services, John Hancock did ‘not assume any fiduciary responsibility of the Contractholder, Plan Administrator, Plan Sponsor, or any other Fiduciary of the Plan.’”
The Romanos brought two fiduciary duty claims on behalf of a putative class, alleging that John Hancock’s treatment of the foreign tax credits breached its fiduciary duties under ERISA and violated ERISA’s fiduciary-prohibited-transactions provisions. First, the Romanos argued that John Hancock should be required to pass through the benefits of the foreign tax credits to the separate accounts because the class members and their respective plans paid the underlying foreign taxes. Specifically, they argued that because John Hancock profited from the foreign tax credits without passing through the commensurate benefit to the underlying plans, it failed to act solely in the best interest of the plans and failed to defray the reasonable expenses of administering the plans. Second, the Romanos argued that by retaining the foreign tax credits, John Hancock dealt with the assets of the plan for its own interest or account in violation of 29 U.S.C. § 1106(b)(1).
The district court granted summary judgment in John Hancock’s favor on the ERISA claims on the basis that John Hancock was not an ERISA fiduciary for the conduct underlying the Romanos’ claims.
On appeal, the Eleventh Circuit affirmed the grant of summary judgment to John Hancock, addressing what it described as an issue of first impression.
Under ERISA, an entity may be either a named fiduciary (named as such in the plan document) or a functional fiduciary to the extent it has or exercises discretionary authority or control with respect to the management of the plan or disposition of its assets. The fiduciary analysis is not “all-or-nothing”; rather courts ask whether an entity is a fiduciary with respect to the particular activity at issue.
Here, because the group annuity contract provided that John Hancock was not assuming fiduciary responsibilities, the appeal turned on whether John Hancock was a functional fiduciary.
First, the court addressed the Romanos’ argument that John Hancock is a functional fiduciary because it exercised authority or control over the management or disposition of the foreign tax credits. The court looked to whether the foreign tax credits constitute plan assets based on “ordinary notions of property rights under non-ERISA law” and the parties’ contract.
Considering ordinary notions of property rights, the court concluded that the foreign tax credits were inalienable and owned by John Hancock as the legal and taxable owner of the shares of the mutual fund. The fact that the foreign tax credits were the result of foreign taxes on the Romanos fund did not make them assets of the fund. This was underscored by the fact that the Romano Law Plan was a tax-exempt plan unable to use the credits.
As to the parties’ contract, the court considered whether the language in the group-annuity contract and recordkeeping agreement granted the Romano Law Plan a beneficial interest in the tax credits. Based on a plain-language interpretation of the parties’ contract, the court similarly concluded that the contract did not confer a beneficial interest in the foreign tax credits. The Romanos pointed to language in the contract to argue that the revenue sharing and the credits that John Hancock received in respect to the underlying investment vehicle are referred to as “revenue from the underlying fund.” They argued that the requirement for John Hancock to use all revenue received from the underlying mutual fund to reduce the Annual Maintenance Charge included the foreign tax credits. Analyzing the plain language of the contract, the court concluded that “credit” did not include foreign tax credits. Rather, the contract’s revenue definition indicated that “credits” applied to the Annual Maintenance Charge referred to credits attributable to the investment management fees paid to affiliates of John Hancock by an underlying investment vehicle. Thus, the Romano Law Plan did not have a beneficial ownership interest in the foreign tax credits, meaning the credits were not plan assets.
Next, the court addressed the Romanos’ argument that because the foreign tax credits arose from John Hancock’s management of the separate accounts that contain mutual funds with certain foreign investments, John Hancock was an ERISA fiduciary with regard to the foreign tax credits that would not have existed absent the foreign investments. The Eleventh Circuit rejected this argument, reasoning that John Hancock did not in fact control the factors that gave rise to the foreign tax credits. Rather, the Romano Law Plan and its participants chose the specific mutual funds in which to invest. John Hancock’s authority was limited to holding the assets and allocating them as instructed. Accordingly, the Romanos, not John Hancock, were the source of the foreign tax credits.
Accordingly, the court held that John Hancock was not an ERISA fiduciary with regard to the foreign tax credits. Fiduciary status was a prerequisite to both of the Romanos’ ERISA claims. Both claims therefore failed as a matter of law and summary judgment was appropriate.