Originally published July 2007
On June 21, 2007, in one of the first cases to address whether ERISA requires the disclosure of fees paid to 401(k) service providers, the United States District Court for the Western District of Wisconsin dismissed plaintiffs’ claims that the fiduciaries of a 401(k) plan sponsored by Deere & Company ("Deere") violated their fiduciary duties under ERISA by failing to disclose revenue-sharing fee arrangements to participants. Hecker v. Deere & Co., 06-C-719-S, 2007 U.S. Dist. LEXIS 45275 (W.D. Wis. June 21, 2007). Significantly, the Court ruled that as currently drafted, neither ERISA nor the regulations promulgated thereunder require plan sponsors to disclose revenue-sharing arrangements. Id. at *11-14. The court also dismissed plaintiffs’ claim that defendants breached their fiduciary duties by selecting funds that charged allegedly excessive fees to participants.
Background
Since last fall, approximately twenty lawsuits have been filed against some of the nation’s largest companies, the officers of those companies and the members of their 401(k) plan committees, challenging the fee structure employed by most 401(k) plans in connection with plan investments. The complaints allege that 401(k) plan fiduciaries violated ERISA by entering into revenue-sharing arrangements and by selecting mutual funds that charge excessive fees. The complaints also allege that the defendants, typically the plan sponsor and plan fiduciaries, violated ERISA’s disclosure requirements by failing to disclose to participants the details of fee arrangements with plan service providers, including revenue-sharing arrangements. Most of the complaints filed in this new wave of ERISA litigation contain a hodgepodge of allegations attacking practices that are widespread in the 401(k) industry. However, despite their bulk, the complaints lack specific factual allegations as to how these practices violate ERISA. Indeed, in Deere the court observed that "[f]ar from a short and plain statement of claims as contemplated by Rule 8, the complaint is 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 to the claims alleged." Id at *8.
The Deere Plan
Deere is a manufacturer of heavy equipment that sponsors a 401(k) plan for its employees. Deere is also the plan administrator for the plan. Deere entered into an agreement with Fidelity Management Trust Company retaining Fidelity as the plan trustee and hiring it to perform recordkeeping and other administrative tasks for the plan. Under the agreement, Deere retained the authority to select investment options for the plan. Deere agreed with Fidelity that it would limit the selection of investment options to funds offered by Fidelity Management and Research Company. The court noted that 23 of the 26 investment options available under the Deere plan were Fidelity funds. In addition to the primary funds offered under the plan, the plan offered participants the ability to invest in over 2500 different publicly available mutual funds from Fidelity.
Fidelity was compensated in part for its duties as trustee by direct payment from Deere. The plan itself made no direct payment to Fidelity. Each of the funds offered under the plan charged investors an asset-based fee. Fidelity Research shared some of the fee revenue it received with Fidelity and the amount of this revenue-sharing was not disclosed to Deere or plan participants. However, Fidelity did disclose in reports and prospectuses the fees it charged to all retail fund customers, including the Deere plan participants.
The Court’s Decision
Defendants filed motions to dismiss plaintiffs’ second amended complaint. Agreeing with defendants, the court rejected plaintiffs’ claim that defendants violated their fiduciary duties under ERISA by failing to adequately disclose plan fees and costs to participants, noting that "[t]here is no evidence of intent in the statute or regulations to reach [the] type of detail [sought by plaintiffs]." Id at *11. The court further observed that the recent proposal to amend the regulations to require disclosure of revenue-sharing arrangements in annual reports "unequivocally confirms" that such disclosure is not required by the regulations currently in place. Id at *13. The court also rejected plaintiffs’ argument that ERISA’s general fiduciary obligations require the disclosure of revenue-sharing arrangements: "Where as here Congress has by statute and related regulation, created detailed rules governing disclosure requirements, it would be inappropriate to ignore and augment them using the general power to define fiduciary obligations." Id at *14.
The court also dismissed plaintiffs’ claim that defendants breached their fiduciary duties by offering investment options with unreasonably excessive fees. The court agreed with Deere that its selection and offering of investment options fell within ERISA Section 404(c)’s safe harbor from liability for breaches of fiduciary duty. Consistent with the court’s ruling that ERISA does not require disclosure of revenue-sharing arrangements, the court rejected plaintiffs’ contention that failing to provide this information prevented participants from making informed investment decisions. The court also noted that there was no evidence that receiving information about revenue-sharing arrangements would have enhanced participant investment decisions. The court concluded that "to the extent participants incurred excessive expenses, those losses were the result of participants exercising control over their investments within the meaning of the safe harbor provision." Id at *20-21.
The court also dismissed plaintiffs’ breach of fiduciary duty claims against the Fidelity defendants. The court observed that under the trust agreement, Deere retained sole responsibility for selecting plan investment options and thus, neither Fidelity defendant was a fiduciary for investment purposes. Id at *21-22.
Impact on Plan Sponsors and Fiduciaries
Although it remains to be seen if other district courts will follow Deere’s lead and dismiss the revenue-sharing and excessive-fee complaints, the court’s decision is a positive sign for plan sponsors and fiduciaries. Notwithstanding this decision, employers should continue to review the 401(k) fee structures of the plans they sponsor to make sure that the fees in place are reasonable in comparison to industry standards. Plan sponsors and fiduciaries should also review plan documents, summary plan descriptions, and participant communications to confirm that fees are adequately disclosed as required by ERISA and the regulations. In addition, plan fiduciaries should be aware of proposed changes to ERISA regulations that may require more detailed disclosure of 401(k) plan fees.
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