In Faber v. Metropolitan Life Insurance Company, No. 09-4901-cv (2nd Cir. 2011), the plaintiffs had brought suit under ERISA, alleging that defendant Metropolitan Life Insurance Company (“MetLife”) had breached its ERISA fiduciary duties to them. The plaintiffs were owed life insurance proceeds as the beneficiaries under certain employee benefit plans that MetLife administered and insured (the “Plans”). Their complaint was that, through the use of “retained asset accounts” (“RAAs”), MetLife had retained and invested, for its own profit, those life insurance proceeds. An RAA is an interest-bearing account backed by funds that the insurer retains until the account holder writes a check or draft against the account.
Under the terms of the Plans, if the life insurance proceeds due a beneficiary exceed a specified amount (for example, $7,500), MetLife establishes an RAA, called a “Total Control Account” (“TCA”), in the name of the beneficiary, credits the TCA with the total amount of the proceeds, and issues the beneficiary a “checkbook” that he or she can use at any time to draw on the TCA for some or all of the account balance. If the life insurance proceeds do not exceed the specified amount, then the proceeds are paid to the beneficiary in a single lump sum. While the TCA remains open, MetLife retains the funds backing the TCA in its general account and invests those funds for its own profit, earning the spread between its return on that investment and the interest paid on the TCA. When the TCA holder writes a check against the account, MetLife transfers funds sufficient to cover the draft to the bank servicing the TCA.
The plaintiffs allege that, by using the TCA mechanism to retain and invest the life insurance proceeds due the beneficiaries, MetLife breached section 404(a)(1) of ERISA, which requires a fiduciary to act solely in the interest of plan participants and beneficiaries, and section 406(b)(1) of ERISA, which prohibits a fiduciary from self-dealing in plan assets. The plaintiffs sought disgorgement of MetLife’s profits from the TCAs, as well as injunctive relief. However, the Second Circuit Court of Appeals (the “Court”) ruled that MetLife met its ERISA fiduciary duties by furnishing the beneficiaries a TCA in accordance with the terms of the Plans, and did not retain plan benefits by holding and managing the assets that back the TCA. Once MetLife creates and credits a beneficiary’s TCA with the life insurance proceeds and provides a checkbook, the beneficiary has effectively received a distribution of all the benefits that the Plan promised, and ERISA no longer governs the relationship between MetLife and the beneficiary. As such, MetLife is not acting in a fiduciary capacity when it invests the funds backing the beneficiary’s TCA. Accordingly, the Court found that MetLife did not breach its ERISA fiduciary duties to the plaintiffs as beneficiaries of the Plans, and ruled that the case should be dismissed.