ERISA 404c Defense

[J Simmons]

In refusing to re-hear the appeal by the employee class in Hecker v Deere, the 7th Circuit addressed some of the DoL's concerns expressed in its amicus briefing. For context, this is one of the Schlicter employee class action suits against large employers alleging that 401k benefits have been depressed by improper revenue sharing and excessive fees. Unlike the other Schlicter situations where a limited number of investments for an investment menus had been set for employees to choose from, the Deere plan allowed employees to choose from 2600+ funds available through Fidelity--highlighting about 19 'for your consideration'. Judge Shabaz of the Wisconsin Western District dismissed in favor of Deere, finding that among the 2600+ there had to be some lower cost funds than the higher fees associated with some of the 19 highlighted investment choices. The 7th Circuit in February affirmed. The DoL has all along amicus briefed the case, and a re-hearing en banc was sought. To this request, the 7th Circuit denied re-hearing, en banc or otherwise, but explained in deference to DoL:

1-the Deere decision by the 7th Circuit was not a "definitive pronouncement on 'whether the safe harbor applies to the selection of investment options for a plan.'"

2-the DoL admitted the 7th Circuit's primary holding, i.e. that

a. there was no fiduciary duty to scour the market to find the fund with the lowest imaginable fees, and

b. it is not imprudent to have offered funds with 'retail fees' charged to the general public (rather than Deere having used its large negotiating strength to secure lower 'wholesale fees')

3-the February decision of the 7th Circuit does not stand for the proposition that ERISA 404c shields a plan fiduciary from imprudently "selecting an overpriced portfolio of funds".

4-the 2600+ Fidelity funds at play in the Deere plan provided too much variety and too much variation in associated fees for allegations of imprudent selection of funds to stand.

The 7th Circuit muddied its February ruling a bit, but the essence remains.

[Laura Harrington]

Thank you for the information and the analysis of the impact of the court's decision.

[Peter Gulia]

Even after John Simmons' good outline, for those who would like to read the source itself (it's a little more than two pages), here's an attachment.

Whether one advises participants or plan fiduciaries, another way to look at the panel opinion (with its addition) is to consider it in choosing what facts to allege, or what facts to design away so that a plaintiff couldn't allege them.

Many of the possible facts that this panel said or suggested might move a complaint past the pleading standards might be facts that Mr. Hecker could have truthfully alleged from what he could have known (without court-sanctioned discovery) in 2006.

If your client's name isn't yet on either side of a litigation caption, there's an opportunity to learn how to design a complaint, or a motion to dismiss it, using someone else's story as your lesson plan.

order_denying_rehearing_in_Deere.pdf

[Guest Sieve]

John/Peter -- I suspect that this rehearing decision killed any potential Supreme Court appeal in this decision's future, especially this Supreme Court. Do you agree?

[J Simmons]

I think it is unlikely now that the US Supreme Court would hear an appeal in this matter. Not one of the 7th Circuit judges voted for en banc review.

Given these little clippings off of the sharper edges that the 6/24/2009 explanation by the 7th Circuit made to its February opinion, and the prospect of being swatted substantively by the current US Supreme Court, it seems that the DoL would not want further review. Save its powder for another day, another court.

If the DoL pushes for an appeal and the current US Supreme Court takes it, it will in my view be a bit of an OK Corral scenario.

[mbozek]

I think it is unlikely now that the US Supreme Court would hear an appeal in this matter. Not one of the 7th Circuit judges voted for en banc review.

Given these little clippings off of the sharper edges that the 6/24/2009 explanation by the 7th Circuit made to its February opinion, and the prospect of being swatted substantively by the current US Supreme Court, it seems that the DoL would not want further review. Save its powder for another day, another court.

If the DoL pushes for an appeal and the current US Supreme Court takes it, it will in my view be a bit of an OK Corral scenario.

It is unlikely that the Supremes will hear an appeal because they only decide matters of law not fact and the supplemental opinion clarifies that the claim brought by the employees was dismissed because the facts in this case as pleaded by these plaintiffs were not sufficient to demonstrate a probability that there was a remedy under applicable law, i.e., merely alleging that fees paid were excecssive because the plan used retail funds instead of cheaper institutional funds is insufficent to survive a motion for summary judgment in the absence of further facts such as showing that the participants failed to receive additonal services not available to retail customers such as investment education and retirement planning which would justify paying higher fees. Also use of retail fees may be permissible if use of cheaper investment options would require require the plan to spend additional funds on services that are provided at the retail level, e.g. recordkeeping.

There are two imporatant takeaways from this case.

1. Benefits practitoners will have to become knowledgeable of the rules for pleading a meritorious case under the Bell Atlantic v. Twombly and Aschroft v. Iqbal decisions because the federal courts are becoming amenable to dismissing claims of violations of ERISA that do not state facts sufficient to demonstrate a reasonable probability (not just the mere possibility) of a violation for which there is a remedy under federal law.

2. The 7th Circuit has joined the 5th Circuit in rejecting the authority of the footnote to the preamble of the 404c regs to require a fiduciary duty to make sure that each individual investment in the plan is prudent. Under the Mead/Chevron doctrine the footnote is not considered by those circuits to be an authorative interpretation of the regulation for which judicial deference will be granted. The Deere court stated in its denial for rerhearing that it would review such language if the Secretary of Labor amended the 404c regs to include the footnote.

Next term the Supremes will hear a similar case decided by the 7th circuit (Jones v. Harris trust) that there is no fiduciary responsibility for directors of a mutual fund to negotiate the lowest possible fee with an investment manager for the fund and that a reasonable fee is one that is mutually agreed to by the directors and the investment manager. Neither Judge Esterbrook who wrote the opinion in Harris or Judge Posner who wrote the dissent in the 7th circuit's decision to deny an en banc review of Harris showed any interest in an en banc review of Deere.