Hecker v. Deere & Co., 45 Employee Benefits Cas. (BNA) 2761 (7th Cir. Wis. Feb. 12, 2009) began with a preamble that signaled the distaste of the Court for litigation directed at plan asset mismanagment. Judge Cook opined in the opening paragraph that:
Even before the stock market began its precipitous fall in early October 2008, litigation over alleged mismanagement of defined contribution pension plans was becoming common. This type of litigation received a boost when, in LaRue v. DeWolff, Boberg & Associates, Inc., 128 S.Ct. 1020, 169 L. Ed. 2d 847 (2008), the Supreme Court held that “a participant in a defined contribution pension plan [may] sue a fiduciary whose alleged misconduct impaired the value of plan assets in the participant’s individual account.” 128 S.Ct. at 1022. Section 502(a)(2) of the Employee Retirement Income Security Act of 1974 (”ERISA”), 29 U.S.C. § 1132(a), provides the basis for such an action.
The ending was no less than advertised from this inauspicious beginning. The service providers were exonerated from any culpability as functional fiduciaries and Deere was exonerated from any inattentiveness to service fees.
While Deere may not have been behaving admirably by creating the impression that it was generously subsidizing its employees’ investments by paying something to Fidelity Trust when it was doing no such thing, the Complaint does not allege any particular dollar amount that was fraudulently stated. How Fidelity Research decided to allocate the monies it collected (and about which the participants were fully informed) was not, at the time of the events here, something that had to be disclosed. It follows, therefore, that the Hecker group failed to state a claim against Deere based on the revenue-sharing arrangement and the lack of disclosure about it.
The problem depicted in Deere is not a new one. Plan fiduciaries have known for years that investment firms were charging fees paid with “soft dollars”. Some took due diligence measures that ameliorated the problem, but many didn’t.
All of this is by way of setting up the essential purpose of this post which is notice of a amici brief posted on SSRN supporting a rehearing en banc in the Deere case.
Amici curiae law professors filed this brief to urge the Seventh Circuit to grant the plaintiffs’ petition for rehearing en banc to clarify the proper scope of the fiduciary duty under ERISA in the context of investment funds. The brief argues that members of the Seventh Circuit have taken conflicting positions on the central issue regarding whether the market for mutual fund fees is competitive, that this case presents an excellent opportunity to reconcile its doctrine in this area, and that the panel’s decision to expand the Section 404(c) exemption to the fiduciary duty eviscerates an essential element in the security of retirement savings plans.
Birdthistle, William A. and Secunda, Paul M.,Seventh Circuit Amicus Brief of Law Professors in Support of Rehearing En Banc, Hecker v. Deere, Nos. 07-3605 & 08-1224(March 18, 2009). Available at SSRN: http://ssrn.com/abstract=1362553
Note: Drafting a complaint that will survive a motion to dismiss in this context is a daunting task. As the case developed, the plaintiffs amended their complaint twice. Nonetheless, the Court found fault. In their attempt to draw the investment firm into the case, the plaintiffs argued that ”notwithstanding the language of the Trust Agreement, Fidelity Trust exercised de facto control over the selection of the funds and Deere rubber-stamped its recommendations.” The Court rejected this argument, observing “That is not, however, what the Complaint alleges.”
Expense Of Fiduciary Litigation – The problem for plaintiffs in ERISA litigation such as the Deere case do not end with a potential loss. Consider this award of costs:
Fidelity asked for $ 186,488.95 in costs, and the court awarded it $ 164,814.43. While this is a substantial amount, we see no abuse of discretion in the district court’s decision. Plaintiffs’ principal complaint is that it was improper to award Fidelity its costs for document selection, as opposed to document processing. Fidelity responds that the costs were for converting computer data into a readable format in response to plaintiffs’ discovery requests; such costs are recoverable under 28 U.S.C. § 1920. The record supports Fidelity’s characterization of the costs, and so we will not disturb the district court’s order