LawyersUSA

When the Department of Labor speaks, employee benefit lawyers listen.

And when the Department chimed in on behalf of participants in a 401(k) excessive fee suit last month, it was no exception.

The move seemed to resuscitate an all-but-dead class action alleging that plan fiduciaries allowed the participants' 401(k) investments to be saddled with excessively high fees and neglected to disclose those fees.

The Department's amicus brief asked the 7th Circuit to overturn the dismissal of a suit against Deere and Co. and Fidelity Investments.

But as exciting as the Labor Department's entry into the appeal may be, what lasting effect it might have on future ERISA litigation remains unclear.

"Anytime the Department of Labor files an amicus brief, people in the industry pay attention and they want to read it carefully to see what it says," said Eric G. Serron, a partner at the Washington, D.C. office of Steptoe & Johnson who focuses on employee benefits litigation.

"But this one is really not that big of a surprise," he said, noting that the Department of Labor's contention in its brief – that §404(c) of ERISA doesn't shield fiduciaries from liability arising from their own imprudence in selecting investment options – wasn't unexpected.

Asset-based fees

The brief was filed in Hecker v. Deere & Co., No. 07-3605, an appeal of a dismissal of a suit brought by participants in 401(k) plans sponsored and administrated by Deere and Co. Fidelity Management Trust Co. served as trustee of the plans, whose collective holdings exceed $2.5 billion.

Deere limited the number of investment options offered to the plan's participants to the 26 options managed by Fidelity, but also gave participants a brokerage window option, allowing them to select from roughly 2,500 publicly available investment options.

Fidelity was compensated through asset-based fees that ranged from .07 percent to 1.01 percent of the value of each fund. Fidelity shared the fees with another subsidiary of its parent company, but this was not disclosed to participants, nor was the amount of the fee disclosed.

A putative class of participants filed a breach of fiduciary duty suit in U.S. District Court against Deere & Co. and Fidelity under ERISA, claiming that the companies imprudently set up the plans with excessively high fees, and that they failed to disclose the fees and the fee-sharing arrangement to the participants.

But the court granted the defendants' motion to dismiss, finding that ERISA imposed no duty to disclose the fee-sharing agreements because the total fees paid for each fund was listed in the prospectus. Further, the court noted, because a proposed Department of Labor regulation change would specifically require disclosing fee-sharing arrangements, the court concluded that no such requirement currently exists.

The court also found that the participants' brokerage window option precluded their claim because §404(c) of ERISA, the statute's "safe harbor" provision, shelters administrators and trustees from liability were participants are given "risk-diversified investment options."

Breathes new life into case

The plaintiffs appealed, but the dismissal caused the case to drop off of the radar of most employee benefits attorneys until the Department of Labor filed its amicus brief.

The Department argues that the statutory safe harbor provision does not shield companies that act imprudently regarding excessive fees.

Pointing to its regulation enforcing §404(c) of ERISA, the Department argued that "although the participants in such defined contribution plans are given control over investment decisions among the options presented to them, the plan fiduciaries nevertheless retain the duty to prudently choose and monitor the investment options – a duty that includes ensuring that the fees charged to the plan by those investments are reasonable."

The Department also argued that its own proposed disclosure requirement does not mean that ERISA does not already impose a duty of prudence and loyalty, and that Fidelity should not be shielded from liability just because Deere & Co. selected the investment funds available to participants.

Jerome Schlichter, a partner at the St. Louis law firm of Schlichter, Bogard & Denton and the attorney representing the participants in the case, said that although the Labor Department's brief is a great boost to his clients' case, it doesn't automatically indicate a sea change in the DOL's stance on 401(k) fee litigation in general.

"This case is unique, and I don't think one can conclude that because the Department of Labor chose to file a brief here, that it means anything about what they will do in other cases," Schlichter said. "It will be a case-by-case determination."

Fact-specific analysis

While employment attorneys are paying close attention to the case, few predict a change in the way they practice – at least not for now.

"This is helpful for defending claims, but I don't view it in changing in any material way the type of advice you'd give an administrator in selecting funds," said David Joffe, a member at the Nashville firm of Boult, Cummings, Conners & Berry who advises plan sponsors, administrators and fiduciaries.

Even if the 7th Circuit reverses the dismissal, Joffe said, the case still has to go through the fact-finding stage and could travel far through the appellate system – even to the U.S. Supreme Court – before practitioners will know its lasting impact.

Serron pointed out that the §404(c) issue presented in the case is not new.

"That issue is one that everybody knows has been out there," Serron said. "There is authority that rejects the DOL's interpretation."

But the case could ultimately clear up some unsettled areas of ERISA litigation and ERISA's "safe harbor" provision – particularly answering just how much having a brokerage window can shield an administrator from liability.

"If I am a fiduciary, or a plan administrator, and I pick the 10 worst funds or I [chose by] throwing darts at a dartboard, but I make a disclosure telling you everything and give you a brokerage window, does that insulate me from liability? I don't think it does," said Joffe.

Questions or comments can be directed to the writer at: kimberly.atkins@lawyersusaonline.com