In a closely watched case in the Western District of Wisconsin, a federal judge on June 21 dismissed claims that Deere & Co. breached its fiduciary duties under ERISA by permitting participants in its 401(k) plan to pay excessive fees. (Click here for a copy of the opinion.) The judge also threw out claims that Fidelity, which acted as recordkeeper for the plan and provided most of the investment options, breached its fiduciary duties by charging and keeping the allegedly excessive fees.
Clearly unimpressed by a complaint that he characterized as “a rambling 38 page collection long on legal argument, public policy rhetoric and repetition, but vague in its allegations of facts which might be relevant,” Judge John C. Shabaz adopted a much narrower interpretation of ERISA’s fiduciary requirements than is customary in ERISA cases. In the process, he also created a direct split of authority among district courts before whom these excessive fee cases are currently pending.
In his opinion, Judge Shabaz held that Deere had complied with all of the statutory reporting and disclosure requirements mandated by ERISA, specifically referencing the rules that require plans to provide summary plan descriptions, annual reports, and summary annual reports. That, he said, was all that Deere needed to do. The Judge found “no merit” in the participants’ contention that ERISA’s fiduciary duty rules impose additional disclosure obligations separate and apart from the statute’s minimum reporting and disclosure requirements. Thus, because the plan participants who brought the suit had not alleged that Deere failed to provide those statutorily mandated disclosures, Judge Shabaz held that Deere & Co. could not be liable for breach of fiduciary duty.
That holding is directly at odds with a ruling handed down by the United States District Court for the Northern District of California in a case challenging Bechtel’s 401(k) plan fee practices. Refusing to dismiss those claims before discovery commenced, Judge Charles Breyer expressly considered, and flatly rejected, Bechtel’s argument that its compliance with ERISA’s reporting and disclosure rules created a safe harbor from fiduciary liability. Said Judge Breyer: “To hold otherwise would be to hold that any amount of misrepresentation or dishonest dealing on behalf of the Plan, at least with respect to the fees and expenses charged against the Plan, cannot provide the basis for a cause of action so long as such fees and expenses are disclosed in the manner prescribed by ERISA and the Department of Labor’s regulations. Defendants have provided no authority for such a proposition, and the Court declines to adopt that position here.”
With fee challenges pending before 13 different judges in five different federal Circuits, inconsistent rulings on substantive issues are virtually guaranteed. That, in turn, increases the likelihood that the parties will appeal adverse rulings, and that appellate courts – and ultimately perhaps the U.S. Supreme Court – will be shaping and re-shaping the parameters of ERISA’s obligations for some time to come. Already employers in California appear to have a broader duty to disclose fee information than those located in Wisconsin.
The court’s ruling in the Deere case also is inconsistent with the DOL’s view of ERISA Section 404(c). Judge Shabaz held that even if some of the Deere plan’s investment options charged excessive fees, Section 404(c) insulated the plan’s fiduciaries from liability. He reasoned that because the Deere 401(k) plan offered a brokerage window, it was impossible that all investment options offered under the plan charged excessive fees. Therefore, he said, participants were responsible for any losses they incurred by choosing investment options that charged excessive fees.
The DOL, on the other hand, has long opined that ERISA fiduciaries remain responsible for prudently selecting a plan’s menu of investment options, regardless of how participants select among those options. Thus, the act of including in such a menu an investment fund that is imprudent because it charges excessive fees is not, in the eyes of the DOL, an act that is shielded by Section 404(c).
The Deere decision is an important victory for the defendants, but will almost certainly be appealed. The Schlicter firm has seven other cases challenging 401(k) fee practices pending in the same federal Circuit in which Judge Shabaz sits, and cannot afford to have the court’s ruling in Deere become settled law. If the Seventh Circuit upholds Judge Shabaz’s reasoning, however, it may encourage 401(k) plan sponsors to adopt brokerage windows so as to maximize their protection under Section 404(c).