ERISA Fiduciaries Have No Affirmative Duty to Disclose Revenue Sharing, Seventh Circuit Rules

1. Functional Fiduciaries. Research Company and Trust Company were "functional fiduciaries" in the selection of the investment options, the structuring of fees and the disclosure of information to plan participants. Although not explicitly retained as fiduciaries in that regard, they exercised control over the selection, fee structuring and disclosure of information such that they constituted fiduciaries for that purpose, and were liable for the ERISA breaches in that regard.
2. Duty to Disclose. The fiduciaries had an obligation to disclose the fee sharing arrangements between Research Company and Trust Company
3. Imprudent Selection. The selection of the plans' investment options was imprudent because of their high fees.

• Documents Control / Functional Fiduciary. Participants argued that the structural requirement imposed by Trust Company - that a plan's designated investment options be limited to Research Company's mutual funds and funds managed by Trust Company - amounted to "discretionary authority" over the management of the plans, making Trust Company and Research Company ERISA fiduciaries with regard to those matters. The Court summarily dismissed this contention:

  In any event, the Trust Agreement gives [the employer], not [Trust Company], the final say on which investment options will be included. The fact that [the employer] may have discussed this decision, or negotiated about it, with [Trust Company] does not mean that [Trust Company] had discretion to select the funds for the Plans.

  The Court made clear that playing a role or providing advice does not transform a company into a fiduciary. Many professionals help to develop a plan but, despite their influence, they are not considered fiduciaries.

• No Affirmative Duty to Disclose Revenue Sharing. The Court ruled that revenue sharing, as structured in this case, did not violate ERISA and was not required to be disclosed to plan participants. Under the facts, the employer disclosed the total fees to be charged on the fund level - and that was "enough," according to the Court. The later distribution of the fees among the service providers was not material information a participant needed in making investment decisions.

  The total fee, not the internal, post-collection distribution of the fee, is the critical figure for someone interested in the cost of including a certain investment in her portfolio and the net value of that investment. ... The later distribution of fees by [Research Company] is not information that the participants needed to know to keep from acting to their detriment. ...The information is thus not material, and its omission is not a breach of [the employer's] fiduciary duty.

  Participants argued that the Summary Plan Description gave the misimpression that the employer was paying the administrative costs of the plan - when, in fact, the participants were paying those costs through fees disclosed and taken on the fund level. However, for the non-disclosure of revenue sharing to constitute an ERISA fiduciary violation in that circumstance, the Court explained that there must be either an intentionally misleading statement or a material omission - and the participants alleged neither. The employer, it appeared under the facts submitted, apparently understood Trust Company's administrative services to be free of charge.

• ERISA § 404(c) Compliance & Brokerage Window. The Court held that compliance with ERISA § 404(c) - when coupled with a "sufficient range of options so that the participants have control over the risk of loss" - shields a fiduciary from claims of imprudent selection of funds. As such it dismissed the claim that the fiduciaries' selection of the plan investment options was imprudent. The Court noted that there was "no plausible allegation" that the employer failed to comply with ERISA § 404(c) and its requirements - for example, the requirements to describe the investment alternatives, explain how to give investment direction, describe fees and expenses, etc. The Court also noted that there "was no room for doubt" that the plan offered a sufficient mix of investment options, with the 25 designated investment options and a brokerage window through which some 2500 additional mutual funds were available.

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Copyright 2009, Deloitte.

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