Early Returns in 401(k) Fee Cases Favor Defendants

January 1, 0001


A recent spate of so-called 401(k) fee cases has generated anxiety among employers and 401(k) service providers. While the majority of these cases remain undecided, the early returns are positive for employers and service providers. This Client Alert provides a brief overview of the most significant developments and expected future events in these cases.

The cases started to appear in September, 2006. Since then, a plaintiffs' law firm in St. Louis has filed 15 lawsuits against large 401(k) plan sponsors. The cases generally alleged that the investment funds made available to 401(k) participants were causing participants to pay excessive fees to providers of investment and recordkeeping services. Other plaintiffs’ firms brought similar cases.

The most significant decision to date is Hecker v. Deere from the Seventh Circuit Court of Appeals in Chicago. Earlier this year, the Seventh Circuit affirmed the dismissal of a complaint against Deere, Inc. and Fidelity Investments, and in late June 2009 denied a petition to rehear its earlier decision.

Much of the legal commentary about Hecker has focused on the court's broad reading of the safe harbor offered from fiduciary liability by Section 404(c) of ERISA. In general, Section 404(c) provides that plan fiduciaries are not liable for investment losses caused when participants exercise control over the investment of their individual plan accounts. In its original decision, the court found that there was no plausible allegation that the plan failed to satisfy Section 404(c), and that the safe harbor of Section 404(c) insulated the fiduciaries from liability for the mutual fund fees. In its decision on rehearing, the court emphasized the specific facts of the Deere plans which had more than 20 mutual fund options as well as a mutual fund window that offered an additional 2500 mutual funds. Plaintiffs have stated publicly that they intend to seek further review of the decision from the Supreme Court, but a grant of such review is always a long shot.

Other parts of the Seventh Circuit's decision are less groundbreaking and consistent with holdings from other courts dealing with similar cases. The Seventh Circuit joined several district courts in holding that there is no ERISA fiduciary duty to disclose revenue sharing payments related to mutual funds that are investment options under 401(k) plans. Since the total expense ratio for a mutual fund is disclosed, participants investing in the mutual funds already know what level of charges they are paying. In a quotable passage, the court also rejected the claim that the funds offered as options had excessive fees, stating that ERISA imposed no fiduciary duty "to scour the market to find and offer the cheapest possible fund." Rather, the court noted, it was prudent to offer participants a broad range of investment options whose fees were subject to a "market check" of competition. Besides the Deere case, similar claims have been wholly or partially rejected in three other of these cases: Taylor v. United Technologies Corp., 2009 WL 535779 (D.Conn. 2009); Kanawi v. Bechtel Corp., 254 F.R.D. 102 (N.D.Cal. 2008); and Tibble v. Edison International, 2009 WL 2382348 (C.D.Cal. 2009).

The fact that plaintiffs have not fared well in the early going hardly means that either these cases or the issues they raise are over. The next few months should bring a number of important developments in the cases already decided. These will include a trial of two remaining claims in Tibble v. Edison in October, the anticipated decision of the Second Circuit in New York on appeal of Taylor v. United Technologies Corp., and a trial in November of another of these cases, Tussey v. ABB, Inc. The Eighth Circuit in St. Louis also will hear oral argument in late September on an appeal from a dismissal of a complaint filed by a different law firm involving Wal-Mart's gigantic 401(k) plan, Braden v. Wal-Mart Stores, Inc. It is not unrealistic to expect that the outcome of most or even all of these events will be known by the end of 2009, bringing either further clarity or confusion to the litigation landscape.

The fact that defendants are thus far winning these cases does not mean that fiduciaries need not be concerned with fees under 401(k) plans. What the courts seem to be saying thus far is that they will not micromanage 401(k) plans or second-guess fiduciary decisions that appear reasonable, even if not perfect. The best evidence for a fiduciary in these cases and future cases, however, is a well-documented record showing that the fiduciaries understood the basic factors affecting fees, were aware of the alternatives they could choose, and made rational decisions that were in the interests of the plans and their participants.

O'Melveny and Myers LLP represents the defendants in various fee cases, including all of the defendants in Tibble v. Edison International and the Fidelity defendants in Hecker v. Deere and Tussey v. ABB.