On March 3, 2009, the U.S. District Court for the District of Connecticut granted summary judgment for the plan sponsor and related defendants on claimed ERISA violations for alleged revenue sharing and excessive fees in connection with plan investment options. Taylor v. United Technologies Corp., No. 3:06cv1494 (Mar. 3, 2009). (Click here for the opinion.) In earlier rulings, the court had denied a motion to dismiss and granted a motion for class certification.

Since at least 1997, Fidelity Institutional Retirement Services had provided administrative and recordkeeping services to the United Technologies Corporation (UTC) Employee Savings Plan, a 401(k) plan. As of 1997, participants had 16 investment options, including the UTC Stock Fund and 10 actively managed mutual funds, several of which were Fidelity funds. The record reflected periodic reviews of the investment options, at one point with an outside consultant, as a result of which investment options were both added and removed. By January 2006, there were 24 options, including five retirement date target funds, and in 2007, five more target date funds were added.

UTC and Fidelity negotiated a base annual fee for the latter’s services of $40 per participant (later increased), but this amount was reduced by $1.50 per participant for every $100 million invested in Fidelity actively managed mutual funds. In 2002, UTC began to assess participants a $10 annual fee to pay a portion of Fidelity’s fee. Because of the credits for investments in Fidelity funds, however, Fidelity’s fee was eventually reduced below $10, and UTC began to charge participants only the actual amount of the Fidelity fee. In addition to this fee, some (but not all) of the mutual funds available as investment options paid a “sub-transfer agent fee” to Fidelity for its recordkeeping services, an amount that was part of each such fund’s expense ratio.

This case was one of numerous lawsuits filed by the same law firm in September 2006 against plan sponsors attacking alleged revenue-sharing practices in connection with 401(k) plans. In the complaint and a subsequent amended complaint, plaintiffs’ claims included that defendants breached ERISA fiduciary duties by allegedly including imprudent investment options; allowing the Plan to pay unreasonable fees; failing to monitor fees; failing to make proper disclosure with respect to the fees; and maintaining too much cash in the UTC Stock Fund.

In August 2007, the court denied defendants’ motion to dismiss, and in June 2008, the court certified a class of past, present and future participants in the Plan since 1997. After development of a factual record on the merits, the court last week granted defendants’ motion for summary judgment in an opinion that included the following rulings:

  • The court found no merit to plaintiffs’ argument that use of actively managed funds was imprudent because lower-fee index funds generally perform better. The court found that the fiduciaries had undertaken appropriate consideration of investment options in selecting the funds in question and further noted that two of the actively managed funds had outperformed market benchmarks.
  • The court also rejected the argument that the fiduciaries should have used less-costly managed separate trust accounts rather than actively managed funds, finding that plaintiffs had neither attacked the fees of any specific mutual fund nor established that such trusts were equivalent investment vehicles. The court also found no evidence to support plaintiffs’ assertion that UTC was motivated by the potential discount to its recordkeeping fees when it selected several Fidelity funds as investment options.  
  • The court also rejected plaintiffs’ claim that the sub-transfer fees or “revenue-sharing” payments to Fidelity were improper. Initially, without expressly accepting or rejecting the holding of another judge on the same court in Haddock v. Nationwide Financial Services, Inc., 419 F. Supp. 2d 156, 170 (D. Conn.), that revenue-sharing payments may constitute plan assets, the court found that the first prong of Haddock’s “functional” plan asset test was not met because Fidelity was not a fiduciary. (Click here for our prior alert on Haddock.) Curiously, the court did not discuss or even acknowledge the recent Seventh Circuit decision in Hecker v. Deere, No. 07-3605 and 08-1224 (Feb. 12, 2009), squarely rejecting the argument that revenue-sharing payments are plan assets. (Click here for our prior alert on the Hecker decision.)  
  • The court further found that plaintiffs had failed to establish that Fidelity’s fees were materially unreasonable and beyond the market rate or that UTC had failed to monitor fees properly.  
  • The court rejected claims that defendants had failed to make proper disclosure as to fees. It agreed with other courts holding that sub-transfer agent fees were not material since they did not affect the share price. It also held that defendants had no duty to disclose the recordkeeping fee reductions that flowed from investments in the Fidelity funds because the evidence showed that these discounts were not a motivating factor in selecting the fund and the discounts did not affect the investment value of the funds.  
  • The court also rejected claims (i) that the plan fiduciaries had retained too much cash in the UTC Stock Fund, finding that the cash levels, which varied from time to time, were the result of prudent analysis, and (ii) that “float” had been improperly retained by Fidelity or the trustee, ruling that plaintiffs had not produced evidence to support that claim.