In a victory for employers, the defense in Hecker v. Deere & Co. successfully beat back the first of numerous class action lawsuits alleging 401(k) abuse to reach the federal circuit level.
Hecker plaintiffs, like others in similar suits that plaintiffs' firms brought under the Employee Retirement Income Security Act (ERISA), attacked plan sponsors for falling short as fiduciaries. Schlichter Bogard & Denton initiated this wave of litigation in 2006, filing suits against several large corporations, including Boeing and Kraft Foods.
"There's the old joke about why Jesse James robbed banks--because that's where the money is," says Stephen Rosenberg, a partner at The McCormack Firm. "These big corporations have huge amounts of assets to generate big dollar claims."
In Hecker, employees at Illinois-based Deere & Co. said they assumed the company paid any fees associated with directing their 401(k)s, which were managed by Fidelity Trust. But with the help of Schlichter, they learned Deere didn't pay Fidelity Trust for administering the plans. Fidelity Research, which recommended the funds included in the plans, compensated Fidelity Trust for acting as trustee by sharing the fees it charged for the mutual funds--and Deere's employees found those fees excessive.
Three employees filed the class action suit, alleging Deere breached its fiduciary duty by failing to keep an eye on Fidelity's actions and neglecting to inform employees of exactly what was happening with their money. They also sued Fidelity Research, arguing the company overcharged investors so it could pay Fidelity Trust and other business partners with the extra money.
But the 7th Circuit rejected those arguments Feb. 12. The court dismissed Hecker, affirming the district court's ruling that the mutual fund fees held to the marketplace standard and that it didn't matter that Deere kept employees in the dark about the fee-sharing arrangement.
As a result of the faltering economy and plummeting 401(k)s, people are examining their investments more carefully--and looking for someone to blame for the problems, according to Charles Plenge, a partner at Haynes and Boone. "On the surface, the arguments seem to have some merit, but when you look at what actually went on, the court determined that there weren't any problems with the way Deere ran its plan," he says.
The primary question in cases such as Hecker is whether the fiduciary acted prudently when it administered the 401(k) plan in the first place, says Joelle Sharman, a partner at Ford & Harrison.
"ERISA basically says, 'You don't have to be right. You just have to be prudent,'" she says. "ERISA has that little fiduciary catchall where [people] try to point fingers--'You should have disclosed all these fees because maybe I would have picked a different investment.'"
Section 404(c) of ERISA, the so-called "safe harbor" provision, relieves a fiduciary of liability as long as the employer selects a fund manager that gives employees plenty of control over their 401(k)s.
The court ruled Deere adequately exercised its duty of prudence because Fidelity Trust offered numerous investment options, including 23 mutual funds, two investment funds, a fund facilitating investment in Deere stock, and access to the Fidelity division BrokerageLink, which offered another 2,500 funds managed by different companies. Participants could direct their money to the various funds depending on their tolerance for risk. Fidelity disclosed the fees associated with the funds and offered funds that charged a range of fees, so participants weren't limited only to the most expensive options.
Even though participants didn't know about the fee-sharing arrangement, the court ruled it didn't matter.
"If you're an employee of XYZ company, and you're a participant in its defined-contribution retirement plan, you need to know the amount of investment earnings on your account, the total cost you're paying to have those investments, and what kind of services you're getting through the retirement plan," says Charles Jackson, a Morgan, Lewis & Bockius partner who represented the defendants. "That's what ERISA requires."
Plaintiffs' representatives did not respond to a request for a comment.
Even though the 7th Circuit quickly dismissed the case, this might not be the end of the road for Hecker. As of press time, the Department of Labor, AARP and a group of law professors had filed briefs supporting the plaintiffs' petition for a full circuit rehearing. Jackson notes that a rehearing wouldn't necessarily be bad for the defense. "This case presents very important issues," he says. "The court of appeals may rehear it to affirm the result that the three-judge panel already reached."
As for the rest of the ERISA-based suits, experts caution not to put too much stake in the Hecker decision.
"Hecker is almost a quintessential law and economics opinion. It assumes the 401(k) plan included funds that charged the same [fees] as the market as a whole, and that's all we need to know," Rosenberg says. "I would be surprised if many other courts are willing to just stop their analysis at that point."
Although Hecker provides a lot of protection for companies, he advises general counsel to assume the decision is just a baseline for ERISA compliance.
"Hecker didn't impose a very high standard," he says. "Far and below Hecker is going to get you in a lot of trouble in a lot of different jurisdictions."