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Seventh Circuit Dismisses Plaintiffs' Claims Alleging Excessive Fees and Non-Disclosure of Fee Sharing Related to 401(k) Plans

    Client Alerts
  • March 27, 2009

In Hecker v. Deere, the first significant appellate case decided among the slew of cases alleging excessive fees in relation to 401(k) plan administration, the Seventh Circuit recently addressed the duties of plan fiduciaries to control and disclose fees charged to plan participants.

In Hecker, a class of participants in the Deere 401(k) plans sued Deere, the sponsor of the plans, Fidelity Management Trust Co. (“Fidelity Trust”), the plans’ directed trustee and record keeper, and Fidelity Management & Research Co. (“Fidelity Research”), the plans’ investment advisor.  Deere’s 401(k) plans offered participants the option to invest in 23 different Fidelity mutual funds, two investment funds managed by Fidelity Trust, a fund devoted to Deere’s stock, and a Fidelity-operated investment portal called “BrokerageLink,” which gave participants access to 2,500 additional funds managed by different companies.  Fidelity Research advised the Fidelity mutual funds offered by the plans. Plan participants personally chose where to invest their 401(k) plan accounts, the only limitation being that the investment had to be a vehicle provided under the plans.  Fidelity Research shared its revenue, earned from mutual fund fees, with Fidelity Trust, which compensated itself for its services as trustee of the plans through the shared fees rather than by a direct charge to Deere.

In their complaint, the participants alleged that the defendants breached their fiduciary duties under ERISA by providing investment options that required the payment of excessive fees and costs and by failing to adequately disclose the fee structure to plan participants.  Further, they alleged that there was an “impermissible lack of transparency in the fee structure” due to the lack of any disclosure of the sharing of the fees charged by the mutual funds. The district court dismissed all claims against the defendants, and the plaintiffs appealed the ruling.

On appeal, the Seventh Circuit affirmed the district court’s ruling and reached four conclusions regarding plan fees and transparency in a plan’s fee structure. First, under the law as it existed in 2006 (before the Department of Labor issued new proposed revenue sharing disclosure rules), plan fiduciaries had no duty to disclose to participants specific information on “revenue sharing” between plan service providers so long as the plan sponsor disclosed the total plan fees imposed by the various funds.  Second, there was no breach of fiduciary duty by the plan fiduciaries for selecting investment options with alleged “excessive” fees because the plans offered a sufficient array of investment options with a range of fees.  Third, nothing in ERISA prohibited a fiduciary from selecting all of its funds from one management company.  And fourth, ERISA section 404(c) (a safe-harbor provision for plan fiduciaries) does not always shield a fiduciary from an imprudent selection of funds under every circumstance, but it does protect a fiduciary that satisfies its requirements and includes a sufficient range of investment options to enable participants to have control over their risk of loss, as was the case with the Deere 401(k) plans.

The Hecker court took a narrow reading of fiduciaries’ duties to disclose plan fees and fee structures and a broad interpretation of the 404(c) defense.  In light of the number of excessive fee cases, employers with 401(k) plans that allow participants to direct their own investments should continue to assess the investment options provided as well as the fee disclosures.  Further, it should be noted that the Department of Labor’s proposed fee disclosure regulations were anticipated to go into effect in 2009, but due to the change in presidential administrations, the regulations have been put on hold.  Fiduciaries should be ready to comply with these new regulations when they are finalized and become effective.