On February 12, in a decision that could affect the tide of recent ERISA “excessive fee” cases, the Seventh Circuit Court of Appeals affirmed the U.S. District Court’s dismissal of all claims in Hecker v. Deere & Company (7th Cir., Feb. 12, 2009). Deere is the first excessive fee case to reach a federal appeals court, and the Department of Labor filed an amicus brief in support of the plaintiffs arguing that the Court should deny Deere’s motion to dismiss.
The suit involved two 401(k) plans sponsored by Deere. The Company appointed Fidelity Trust to serve as trustee to the plans. The plans offered 23 Fidelity mutual funds, two Fidelity investment funds, a Deere stock fund, and a “BrokerageLink” option that gave participants access to 2,500 additional non-Fidelity funds. Each plan participant directed the investment of his or her plan account among these funds.
Fidelity Management & Research Company (“Fidelity Research”) served as investment advisor for the mutual funds offered as investment options under the plans. Each mutual fund charged a fee, calculated as a percentage of assets. Fidelity Research shared its revenue from these fees with Fidelity Trust.
The Seventh Circuit framed the plaintiffs’ allegations against Deere as follows: first, that Deere breached its fiduciary duty by not informing the participants that Fidelity Trust received money from the fees collected by Fidelity Research, and second, that Deere imprudently agreed to limit the investment options to Fidelity Research funds and therefore offered only investment options with excessively high fees.
With respect to the first claim, the Seventh Circuit held that ERISA does not require the disclosure of revenue sharing arrangements. Deere disclosed to the participants the total fees for the funds and directed participants to the fund prospectuses for information about fund-level expenses. The Court concluded that this was sufficient disclosure under ERISA. The later distribution of the fees from Fidelity Research to Fidelity Trust was not material information the participants needed to know to keep from acting to their detriment. Accordingly, the omission of details of the revenue sharing arrangement was not a breach of Deere’s fiduciary duty. (The opinion notes, however, that the Department of Labor has recently issued proposed regulations which would require the disclosure of revenue sharing arrangements.)
With respect to the second claim, the Seventh Circuit held that the mix of investments and fees under the plans was sufficient. The expense ratios among the Fidelity mutual funds and the funds available through BrokerageLink ranged from 0.7% to 1% of the assets under management. In addition, all of the funds were offered to investors in the general public at the same rates. That it was possible for other funds to have lower expense ratios was viewed by the Court as irrelevant: ERISA does not require “every fiduciary to scour the market to find and offer the cheapest possible fund (which might, of course, be plagued by other problems).”
In addition, the Court noted that it was not improper for Deere to limit the investment options under the plans to Fidelity mutual funds. Again, neither ERISA nor its regulations prohibit a fiduciary from selecting funds from one management company. ERISA requires that a fiduciary behave like a prudent investor under similar circumstances and, the Seventh Circuit noted, prudent investors may limit themselves to funds offered by one company and then diversify within those funds.
Finally, the Seventh Circuit concluded that, even if Deere had breached its fiduciary duties with respect to the disclosure of fees and the selection of funds, an alternate ground for dismissal was available through the “safe harbor” defense under ERISA § 404(c). Under ERISA § 404(c), plan fiduciaries are not liable for losses which result from participant directed investments if: (1) participants have the right to direct the investment of their accounts; (2) the plan offers a broad range of investment options; and (3) participants are given sufficient information to make informed decisions with regard to the investment alternatives under the plan. Because the Court concluded that Deere satisfied these requirements, the safe harbor served as a defense to the fiduciary breach claims.
The case is significant in that the Seventh Circuit dismissed the case in its entirety at the early motion to dismiss stage. The decision should provide welcome reassurance to plans sponsors of large self-directed 401(k) plans that have been a target of excessive fee complaints.