John Hancock Mutual Life Insurance v. Harris Trust & Savings Bank
510 U.S. 86, 1993 U.S. LEXIS 7940, 126 L. Ed. 2d 524 (1993)
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Rule of Law:
ERISA's fiduciary duties apply to an insurer managing an annuity contract's 'free funds' that are not yet converted into guaranteed benefits and whose value fluctuates with the insurer's investment performance. The 'guaranteed benefit policy' exclusion applies only 'to the extent that' a contract's component part allocates investment risk to the insurer by providing a genuine guarantee of benefit amounts.
Facts:
- In 1941, Sperry Rand Corporation's Retirement Plan, through its trustee Harris Trust and Savings Bank (Harris), entered into a Group Annuity Contract (GAC 50) with John Hancock Mutual Life Insurance Company (Hancock).
- Under the contract, Harris deposited pension plan funds into Hancock's general corporate account, where they were commingled with Hancock's other assets.
- The contract allowed for funds in an accumulation account, the 'Pension Administration Fund,' to be used to purchase guaranteed, fixed-amount annuities for retirees upon request from the plan administrator.
- The value of funds in the Pension Administration Fund that exceeded the amount needed for existing guaranteed benefits (the 'free funds') fluctuated based on Hancock's overall investment performance, meaning the Sperry plan bore the investment risk for these funds.
- Over time, Hancock restricted Harris's ability to access the free funds, refusing requests to make non-guaranteed benefit payments or to transfer the funds without a significant financial penalty (an 'asset liquidation adjustment').
- Harris last used the contract to convert funds into guaranteed benefits in 1977.
- Between June 1982 and 1988, no funds were withdrawn or converted, causing the free funds to grow substantially due to positive investment returns.
Procedural Posture:
- Harris Trust sued Hancock in the U.S. District Court for the Southern District of New York, alleging Hancock breached its fiduciary duties under ERISA.
- The District Court granted Hancock's motion for summary judgment, ruling that Hancock was not an ERISA fiduciary with respect to any part of the contract.
- Harris Trust, as the appellant, appealed the decision to the U.S. Court of Appeals for the Second Circuit.
- The Second Circuit reversed the district court in part, holding that Hancock was an ERISA fiduciary with respect to the 'free funds' because their value was not guaranteed.
- The U.S. Supreme Court granted a petition for a writ of certiorari filed by Hancock.
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Issue:
Does the 'guaranteed benefit policy' exclusion in ERISA shield an insurer's general account assets from fiduciary scrutiny to the extent that those assets support a contract's 'free funds,' which are not converted into guaranteed benefits and whose value fluctuates with the insurer's investment performance?
Opinions:
Majority - Justice Ginsburg
No. The 'guaranteed benefit policy' exclusion does not shield an insurer's general account assets from ERISA's fiduciary standards to the extent those assets are 'free funds' whose value is not guaranteed and fluctuates with the insurer's investment performance. The statutory phrase 'to the extent that' necessitates a component-by-component analysis of the insurance contract. A component qualifies for the exclusion only if it allocates investment risk to the insurer through a 'genuine guarantee' of benefit amounts. Here, the 'free funds' operate like an investment vehicle where the plan, not Hancock, bears the primary investment risk. The mere possibility that these funds could later be used to purchase guaranteed benefits is insufficient to exempt them from being 'plan assets' during the accumulation phase. Therefore, Hancock exercises authority over plan assets and is subject to ERISA's fiduciary duties with respect to its management of the free funds.
Dissenting - Justice Thomas
Yes. The 'guaranteed benefit policy' exclusion should apply to the entire contract, including the free funds, because the contract 'provides for' guaranteed benefits, even if those benefits have not yet been purchased. The majority incorrectly creates a new 'investment risk' test that is not found in the statutory text. The statute's plain language requires only that the contract make provision for guaranteed benefits at some future point, not that it must guarantee a return to the plan or immediately shift all investment risk. The Court's holding overturns the settled expectations of the insurance industry, which has long operated under the assumption, supported by Department of Labor guidance, that general account assets are not 'plan assets.' This decision will impose conflicting state and federal duties on insurers and disrupt the market for group annuity contracts.
Analysis:
This decision significantly narrowed the scope of ERISA's 'guaranteed benefit policy' exclusion, subjecting a vast pool of insurance company general account assets to ERISA's stringent fiduciary duties for the first time. By establishing a functional, risk-allocation test, the Court moved away from a formalistic reading of the statute, focusing instead on the economic reality of who bears the investment risk. This holding increased protections for pension plans by making insurers fiduciaries over variable-return funds, but also created substantial compliance challenges and potential litigation risks for the insurance industry, which had relied on a broader interpretation of the exclusion for nearly two decades.
