Over the last few years there has been a wave of ERISA class actions in which plaintiffs have asserted breach of fiduciary duty and prohibited transaction claims against employers that sponsor 401(k) plans, plan named fiduciaries and, in some instances, plan service providers. These cases, filed on behalf of classes of participants or plan fiduciaries, have challenged long-standing customs and business practices in the financial services and retirement plan servicing industries. Among the targets of the plaintiffs’ bar in these cases are the investment options that are offered to retirement plans and the fee structures and revenue sharing practices that have traditionally funded plan administration. Plaintiffs have alleged that defendants – which often include investment providers and plan recordkeepers – have charged excessive administrative fees and failed to disclose fee arrangements to sponsors and participants. Some cases also challenge the investment management fees charged by mutual funds offered to investors through retirement plans. These cases have forced the named fiduciaries of retirement plans to defend the process through which service providers and investment options are selected for plans, as well as the substantive prudence of those selections. Service providers have been required to defend the products and pricing they offer in the competitive investment management and retirement plan servicing markets. Over two dozen suits have been filed the last few years, many of which survived early challenges to the pleadings, where courts ruled that claims could be brought and go forward to trial.
As these cases gain attention against the backdrop of the current economic crisis and recent Department of Labor initiatives to address disclosure of retirement plan fees, the last several months have seen a number of victories for defendants. Most significantly, the U.S. Court of Appeals for the Seventh Circuit last month affirmed dismissal of the complaint in Hecker v. Deere & Co., Nos. 07-3605 & 08-1224, 2009 WL 331285 (7th Cir. Feb. 12, 2009). In this first appellate decision in the wave of participant-filed suits challenging 401(k) plan fees, the Hecker plaintiffs’ ERISA breach of fiduciary duty claims against the employer sponsoring the plan and two of its service providers were dismissed in June 2007 by the U.S. District Court for the Western District of Wisconsin, as reported in greater detail in our July 3, 2007 Financial Services Alert. On February 12, 2009, the Seventh Circuit affirmed dismissal on the grounds that the employer had breached no fiduciary duty based on the alleged failure to disclose revenue sharing between service providers, and that it had not acted imprudently in selecting investment funds for the plans, as reported in greater detail in our February 17, 2009 Financial Services Alert. The court also affirmed dismissal of the claims against the two service provider defendants, finding that neither possessed relevant fiduciary authority such that either could be liable under ERISA for disclosing revenue sharing practices or choosing investment options. In rejecting the plaintiffs’ core allegations that the funds in the plans charged excessively high fees, the court relied heavily on the fact that mutual fund fees are set in a competitive market and that the plans at issue offered funds with a wide range of fees, including 2,500 funds that were accessible through a brokerage window. The plaintiffs have filed a petition with the Seventh Circuit for rehearing by the panel and rehearing en banc; the Department of Labor, which had filed an amicus brief prior to the recent decision, filed a second amicus brief on March 19, 2009 seeking panel rehearing and two other amici briefs were filed seeking panel rehearing and rehearing en banc, one by certain non-profit organizations led by AARP and the second by a group of five law professors.
Defendants in other suits have also obtained dismissal on the pleadings in recent months. In September, the District of Massachusetts dismissed the complaint in Columbia Air Servs. Inc. v. Fidelity Management Trust Co., No. 07-11344, 2008 WL 4457861 (D. Mass. Sept. 30, 2008). One of a handful of suits filed not by a plan participant but by a plan fiduciary purporting to represent a class of fiduciaries of all plans serviced by the same provider, the complaint in Columbia Air challenged the fees and revenue sharing payments received by the plan’s directed trustee and recordkeeper. The court dismissed the suit, finding that the plaintiff failed to allege facts that the defendant acted as a fiduciary of the plan with respect to its contractual compensation and receipt of revenue sharing payments from fees collected from affiliated mutual funds.
In October, the Western District of Missouri granted defendants’ motion to dismiss in Braden v. Wal-Mart Stores, Inc., No. 08-03109 (W.D. Mo. Oct. 28, 2008). The Braden complaint asserted claims against the plan’s employer-sponsor and the plan’s named fiduciaries, alleging, among other things, excessive and undisclosed fees and imprudent selection of the plan’s mutual fund options, which included 10 retail class funds, most of which were actively managed. The court dismissed the plaintiff’s claims based on alleged excessive fees and undisclosed revenue sharing practices. The court found no allegations to support the claim that the defendants had failed to investigate the funds selected for the plan, and ruled that the defendants were under no duty to disclose revenue sharing agreements. This case is currently on appeal to the Eighth Circuit.
While many of the dozens of excessive fees cases filed since 2006 have survived the motion to dismiss stage, defendants have also recently obtained victories at later stages in the litigations. In Kanawi v. Bechtel Corp., No. 06-05566 (N.D. Ca. Nov. 3, 2008), the defendants obtained a full victory with respect to the plaintiffs’ excessive fees claim when the court held that the evidence did not support a determination that the fees paid by the plan were “patently unreasonable,” or that the defendants abrogated their duties in reviewing the performance of the funds. Declining to second-guess the defendants’ business judgment or to rely solely on hindsight, the court noted that “the test of prudence is one of conduct and not performance.” With respect to the plaintiffs’ claim that the defendants engaged in prohibited transactions by retaining an investment manager and service provider that lacked independence, the court dismissed that claim to the extent that the challenged fees were paid by the employer and plan sponsor, and not out of plan assets, leaving only the plaintiffs’ claim with respect to a four-month period during which the fees were paid from plan assets. Following the order, the parties reached a settlement of the only remaining claim. A settlement agreement was signed earlier this month, pending final court approval.
The defendants in Taylor v. United Tech. Corp. et al., No. 06-1494, 2009 WL 535779 (D. Conn. March 3, 2009), also obtained summary judgment on the eve of trial on similar claims of imprudent investment selection and excessive and undisclosed fees. The court rejected the plaintiffs’ challenge to the plan’s use of actively managed mutual funds, noting that in some instances the plan’s active funds outperformed their index benchmarks, and that in any event the defendant fiduciary’s fund selection process included appropriate consideration of the fees and returns of the selected funds. The court also rejected the plaintiffs’ excessive fees claim, where the plaintiffs failed to proffer evidence to show that the plan’s service provider received compensation that was “materially unreasonable” or “beyond the market rate.” Judgment was entered for defendants on March 6, 2009.
Significant motions are pending in a number of other suits, with decisions expected in the next few months. Trial dates have also been set for a number of cases for 2009, and at least some remaining cases that survive these motions are likely to be tried this year.