Section 401(k) plans and other plans providing for participant direction of investments typically are designed and operated with the intent of qualifying for the protections under Section 404(c) of ERISA. Yet the scope of that protection continues to be uncertain. A relatively narrow view of Section 404(c) relief has been adopted by the DOL and endorsed by some courts. However, a growing number of cases have rejected the DOL position in favor of a more expansive view.
Section 404(c) provides that, if a participant exercises control over the investment of his plan account (as determined under DOL regulations), “no … [plan] fiduciary shall be liable … for any loss, or by reason of any breach, which results from the participant’s exercise of control.” The DOL regulation under Section 404(c) provides that, where the regulation’s detailed conditions relating to participant control are satisfied, plan fiduciaries are relieved of liability for any loss or breach “that is the direct and necessary result of the participant’s … exercise of control.” 29 C.F.R. § 2550.404c-1(d). In the preamble issued with the Section 404(c) regulation, the DOL expressed the view that “the act of limiting or designating investment options which are intended to constitute all or part of the investment universe of a Section 404(c) plan is a fiduciary function which … is not a direct or necessary result of any participant direction of such plan.” 57 Fed.Reg. 46906, 46927 n.27 (Oct. 13, 1992). Thus, the DOL takes the position that – even where the conditions of the regulation are satisfied – Section 404(c) does not protect a plan fiduciary from liability where a participant invests in an investment option that was designated by the fiduciary in violation of his duty of prudence or loyalty. The DOL has argued that this position is entitled to “controlling deference” by the courts. See Brief of Amicus Curiae Hilda L. Solis, Secretary of the U.S. Department of Labor, Kanawi v. Bechtel Corp. et al., No. 09-16253 (9th Cir.)
Some courts have agreed with the DOL’s view regarding the scope of protection from liability under Section 404(c). For example, in In re Tyco Int’l Ltd. Multidistrict Litig., 606 F. Supp. 2d 166 (D.N.H. 2009), participants sued plan fiduciaries asserting that the fiduciaries had acted imprudently in making employer stock available as an investment option under a participant-directed investment plan. When the defendants raised Section 404(c) as a defense, the plaintiffs moved for summary judgment, arguing that Section 404(c) does not protect the fiduciaries’ designation of investment alternatives. In granting the motion, the court indicated that, in its view, both the statute and the regulation are unclear, but the DOL had “reasonably determined in the preamble to its regulation that losses which result from a fiduciary’s designation decision are neither a ‘direct’ nor a ‘necessary’ result of a participant’s exercise of control.” Id. at 169. While the court declined to decide whether the DOL position was entitled to “controlling weight,” it did give some deference to the DOL determination because it believed it had the “power to persuade.” Other courts have followed a similar analysis. See Kanawi v. Bechtel Corp., 590 F. Supp. 2d 1213, 1231-32 (N.D. Cal. 2008); In re Dynegy, Inc. ERISA Litig., 309 F. Supp. 2d 861, 894 n.57 (S.D. Tex. 2004); In re Worldcom, Inc. ERISA Litig., 263 F. Supp. 2d 745, 764 n.12 (S.D.N.Y. 2003); DeFelice v. U.S. Airways, Inc., 497 F.3d 410, 418 n.3 (4th Cir. 2007)(dictum).
A number of cases, however, have disagreed with the DOL’s interpretation. The leading decision on this side of the argument is the Seventh Circuit’s ruling in Hecker v. Deere & Co., 569 F.3d 708 (7th Cir. 2009), which was described in Goodwin Procter’s June 25, 2009 ERISA Litigation Update. Earlier this year, the Supreme Court decided not to review the Seventh Circuit’s decision. See Hecker, 2010 WL 154965 (U.S. Jan. 19, 2010). Significantly, the Hecker court specifically rejected the DOL’s argument that its position on the scope of Section 404(c) protection – set forth in a preamble to a regulation – is entitled to controlling weight. The Fifth Circuit has reached a similar conclusion, finding that the DOL’s interpretation was unreasonable and in conflict with the language of the statute. Langbecker v. Electronic Data Systems Corp., 476 F.3d 299, 310-11 (5th Cir. 2007). See also Abbott v. Lockheed Martin Corp., No. 06-cv-0701, 2009 WL 839099 *12 (S.D. Ill. Mar. 31, 2009) (appeal pending, Case No. 09-8019, 8022 (7th Cir.).
The DOL continues to focus significant attention on this issue. On December 28, 2009, it filed an amicus brief with the Ninth Circuit in the case of Kanawi v. Bechtel Corporation, arguing that its interpretation of the scope of Section 404(c) protection should be upheld. In Kanawi, participants have sued plan fiduciaries, asserting that those fiduciaries breached the duties of prudence and loyalty, and engaged in prohibited transactions, when they designated as investment alternatives under the plan certain mutual funds that allegedly were related to the plan sponsor (and affiliates) and charged excessive fees. The DOL’s brief argues that the Ninth Circuit should affirm the district court’s holding that Section 404(c) does not provide relief for these alleged violations. According to the DOL’s brief, “[i]f the plaintiffs’ allegations are true, the losses to the plan from the payment of unnecessary and excessive fees are not the ‘direct and necessary result’ of the participants’ exercise of control within the meaning of the [DOL] regulation … but rather the result of the fiduciaries’ imprudence in selecting and retaining the … mutual funds when it was imprudent, or disloyal, to do so.”