Fourth Circuit upholds lower court decision: “sales pitch” for services is not fiduciary advice

On July 17, 2023, the Fourth Circuit Court of Appeals upheld a decision for defendant Aon in Reetz v. Aon Hewitt, finding among other things that a “sales pitch” to Lowe’s 401(k) plan fiduciaries of delegated fiduciary services by an Aon sales team did not constitute fiduciary advice. In this article we review the decision.

Background

This litigation began as a suit by a class of plaintiffs in the Lowe’s 401(k) Plan against both Lowe’s fiduciaries and Aon, challenging the prudence of “removing certain investment options from Lowe’s 401(k) retirement plan … and replacing them with an option to invest in a growth fund established and managed by Aon Hewitt ….” In support of that claim, plaintiffs alleged that the Aon Growth Fund:

Had a “limited track record” and “a negative rate of return” (when it was selected).

Replaced “popular, established, more diverse and profitable investment options.”

Used a “novel” investment strategy that was “difficult for [Aon] Hewitt to execute.”

Had no “consistent benchmark.”

Plaintiffs also alleged a breach of the ERISA duty of loyalty by Aon both in “cross-selling” delegated fiduciary services to Lowe’s fiduciaries and then, having been appointed a “delegated fiduciary” by Lowe’s, including the Aon Growth Fund in the plan’s fund menu.

The lower court denied defendants’ motion to dismiss. Lowe’s settled its part of the case in 2021. There was a subsequent bench trial of the claims against Aon, which Aon won. Plaintiffs then appealed that decision to the Fourth Circuit Court of Appeals.

Plaintiffs’ claims

Plaintiffs’ claims focus on (1) recommendations made by Aon in its (acknowledged) fiduciary role as an advisor to the plan to revise the plan fund menu and significantly reduce the number of funds offered, (2) Aon’s “pitch” of delegated fiduciary services, and (3) Aon’s decision (after it was appointed a delegated fiduciary) to include as one of three fund offerings in the plan’s new fund menu the Aon Growth Fund – an equity fund-of-funds that “would produce returns similar to global equity over the long run, but with less volatility and more protection against losses in down markets.”

Plaintiffs argued that Aon breached its ERISA duty of loyalty “by advising Lowe’s to change [the] plan structure” to significantly reduce the number of funds offered under the plan and by “cross-selling its delegated-fiduciary services.” They argued that Aon breached its duty of prudence by including the Aon Growth Fund in the fund menu, arguing that it underperformed appropriate comparators.

The court’s decision

The Fourth Circuit affirmed the decision below, holding for defendants. Briefly, the court found that:

(1) Aon’s recommendation that plan fund menu offerings be reduced and consolidated was in the best interests of plan participants.

(2) Aon was not functioning as a fiduciary when it made its “sales pitch” of delegated fiduciary services.

(3) The selection of the Aon Growth Fund was prudent – notwithstanding its alleged underperformance. In this regard, the court found that “Aon considered alternative investment funds when creating its fund. And it continued to monitor the fund’s performance. That satisfied Aon’s duty to engage a ‘reasoned decision-making process.’”

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In the rest of this article, we are going to focus on item (2) – the court’s decision with respect to Aon’s sales pitch for its delegated fiduciary services, finding that that sales pitch was not “fiduciary advice.”

When is a sales pitch just a sales pitch?

As we have discussed, the DOL wishes to expand the definition of who is an advice fiduciary, critically to pick up “recommendations” made by call center operators affiliated with mutual fund operators, when a participant getting ready to retire calls up the call center to understand her distribution options. One of the arguments made by providers – in opposition to this DOL project – is that the call center operator is only “selling,” not providing investment advice.

There are actually several questions implicated here. First – does this recommendation make an (otherwise) non-fiduciary call center operator a fiduciary? Most of the litigation with respect to this issue has thus far focused on the “regular basis” part of the five-part test, with the courts finding that, at least under current regulations, one-off advice with respect to, e.g., an IRA rollover does not satisfy the “regular basis” requirement, and thus cannot trigger fiduciary status.

But there is also the more tricky question of whether what the call center operator is saying actually constitutes “investment advice.” The regulation defines investment advice as “advice to the plan as to the value of securities or other property, or … recommendation as to the advisability of investing in, purchasing, or selling securities or other property.” How, exactly, is this sort of advice distinct from (to use the Fourth Circuit’s terminology) a mere “sales pitch?”

Here is the courts’ description of Aon’s presentation with respect to its delegated fiduciary services:

Before the October 2014 meeting, Aon again raised its delegated-fiduciary services. … At the meeting, the consultants and sales team presented separately. During the first half, Abshire and Punnoose [acting as advice fiduciaries] presented Aon’s proposed plan structure. Then the sales team pitched Aon’s delegated-fiduciary services. At no time—during the October 2014 meeting or otherwise—did Aon recommend that Lowe’s engage a delegated fiduciary, much less recommend Aon’s services. That said, there was no clear delineation between the discussions of the alternative structure and the delegated-fiduciary services at the meeting. There was a single PowerPoint presentation. And the sale’s [sic] pitch started with a slide that bridged the topics: “Implementation & Fiduciary Considerations.”

Just to be clear about what happened here: Lowe’s Aon advisors (Abshire and Punnoose), who are acknowledged to have been fiduciaries, made a recommendation (which was clearly fiduciary advice) that Lowe’s consolidate and simplify its fund menu. Then, as part of the same PowerPoint presentation deck, an Aon sales team “pitched” Aon’s delegated fiduciary services. (As described by the court, “such services allow a fiduciary – here, the committee that runs Lowe’s plan – to outsource its duties to a third party.”)

The court found that the Aon sales team’s “pitch” of Aon delegated fiduciary services was not investment advice – it was “selling services.”

A second question, considered by the court, is whether a fiduciary may, in effect, take off its fiduciary hat and “sell” its services without triggering fiduciary liability. Again, the court sided with Aon, finding that “under ERISA … duties only attach ‘to the extent’ a fiduciary is acting in his capacity as fiduciary.” Because, in pitching its delegated fiduciary services, Aon was not acting as a fiduciary, fiduciary liability did not “attach.”

Application to IRA rollover “advice”

Now let’s consider how this approach might be applied to a recommendation by a call center operator to a retiring participant to roll assets out of an ERISA plan and into an IRA, without any related advice as to how to invest those assets. Is that investment advice?

In adopting fiduciary advice Prohibited Transaction Exemption (PTE) 2020-02, DOL effectively withdrew Advisory Opinion 2005-23A (the Deseret Letter). The Deseret Letter had explicitly stated that advice as to a rollover was not investment advice, stating that: “[t]he Department does not view a recommendation to take a distribution as advice or a recommendation concerning a particular investment (i.e., purchasing or selling securities or other property) as contemplated by [the] regulation.”

In withdrawing the Deseret Letter, in PTE 2020-02, DOL stated, “[a] recommendation to roll assets out of a Title I Plan is advice with respect to moneys or other property of the plan and, if provided by a person who satisfies all of the requirements of the five-part test, constitutes fiduciary investment advice.” In this regard, DOL noted that:

A recommendation to roll assets out of a Plan is necessarily a recommendation to liquidate or transfer the Plan’s property interest in the affected assets, the participant’s associated property interest in the Plan investments, and the fiduciary oversight structure that applies to the assets. Typically the assets, fees, asset management structure, investment options, and investment service options all change with the decision to roll money out of the Plan.

This aspect of the PTE – which in the litigation at least has not gotten much attention – seems to expand language in the current regulation, which (as noted above) focuses on a “recommendation as to the advisability of investing in, purchasing, or selling securities or other property.” (We note that ERISA itself is not this narrow, focusing only on “render[ing] investment advice … with respect to any moneys or other property of such plan.”)

Circling back to the issue in Reetz v. Aon, the same thing said in the PTE about rollovers could be said about an appointment of a delegated fiduciary. Such a transaction would be “a recommendation to … transfer … the fiduciary oversight that applies to [plan] assets.” And typically, “assets, fees, asset management structure, investment options, and investment service options” would change in such a transaction and did change when Lowe’s appointed Aon a delegated fiduciary.

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As we have noted, DOL’s reinterpretation of the five-part test in the PTE is currently being litigated. And DOL has put on its agenda (with a proposal due this August) yet another re-write of its fiduciary advice regulation, which will presumably involve substantive changes to the five-part test, which itself will likely be litigated.

One way or another, in this ongoing litigation, the courts will be asked to decide whether the application of advice fiduciary status to call center operators (in the circumstances described above) is authorized by ERISA. And included in that litigation will be arguments about when advice fiduciary status can be defeated by an assertion that the call center operator was a mere sales pitch and not investment advice.

We will continue to follow this issue.