ERISA Fiduciary Guidebook

Seventh Circuit Comments on its Denial of the Petition for Rehearing in the case of Hecker v. Deere

The Seventh Circuit has denied a rehearing in the Hecker v. Deere case.  You can access the opinion issued by the court here. Plaintiffs, the Department of Labor and other interest groups had called for a rehearing.  You can access a couple of the amicus briefs filed in the petition for rehearing on the Guidebook's 404(c) webpage.

The Seventh Circuit made the following points in response to the Amicus Brief filed by the DOL:

(1)  The court said that the disputed footnote in the preamble to the 404(c) regulations is not entitled to Chevron deference: 

. . . [W]e cannot agree with the Secretary that the footnote in the preamble is entitled to full Chevron deference. The panel did defer to the Secretary’s concerns, to the extent that it refrained from making any definitive pronouncement on “whether the safe harbor applies to the selection of investment options for a plan.” Hecker, 556 F.3d at 589. Instead, as we explain further in this order, we left this area open for future development, whether on the basis of a different set of pleadings, or on the basis of a regulation directed to this issue.

(2)  The court noted that the DOL is free to issue regulations that would more specifically address the issue (rather than relying on a footnote):

. . [I]t should go without saying that the Secretary is free to propose and enact new regulations addressed more specifically to the way in which choice of investment options in a plan relates to the safe harbor provision, if she believes that this would be appropriate.

(3)  Regarding the DOL's fears that the Deere opinion would be taken to extreme and used to support reckless conduct by plan fiduciaries, the court issued a warning to plan fiduciaries:

The Secretary also fears that our opinion could be read as a sweeping statement that any Plan fiduciary can insulate itself from liability by the simple expedient of including a very large number of investment alternatives in its portfolio and then shifting to the participants the responsibility for choosing among them. She is right to criticize such a strategy. It could result in the inclusion of many investment alternatives that a responsible fiduciary should exclude. It also would place an unreasonable burden on unsophisticated plan participants who do not have the resources to pre‐screen investment alternatives. The panel’s opinion, however, was not intended to give a green light to such “obvious, even reckless, imprudence in the selection of investments” (as the Secretary puts it in her brief).  Instead, the opinion was tethered closely to the facts before the court . .

4.  Finally, the court made some comments about a key aspect of the debate over fees--services being provided to participants: 

We add another point that was raised earlier but that we did not mention in the opinion: the complaint is silent about the services that Deere participants received from the company sponsored plans. It would be one thing if they were treated exactly like all other retail market purchasers of Fidelity mutual fund shares; it would be quite another if, for example, they received extra investment advice from someone dedicated to the Deere accounts, or if they received other extra services. If the Deere participants received more for the same amount of money, then their effective cost of participation may in fact have approached wholesale levels. We return, therefore, to the general point made in the opinion: this complaint, alleging that Deere chose this package of funds to offer for its 401(k) Plan participants, with this much  variety and this much variation in associated fees, failed to state a claim upon which relief can be granted.

A Decided Victory for Plan Fiduciaries in Company Stock Case as Court Follows Lead of Hecker v. Deere

A recent case from the Northern District of Illinois--Lingis, et al v. Motorola--highlights the impact the Hecker v. Deere case will be having on ERISA fiduciary litigation. In Hecker v. Deere (which has been declared as a major victory for plan fiduciaries in the recent trend of class action "excessive fee" litigation), the Seventh Circuit laid down some principles which were followed by the district court in the Lingis case.  Only this time they were applied in the company stock litigation context. 

The Lingis case involved a complaint by participants against fiduciaries of the employer's 401(k) plan which offered a company stock fund as one of the investment choices under the plan. Prior to July 1, 2000, the stock fund was one of four investment choices available to a participant; after that date the stock fund was one of nine investment choices offered. The governing documents of the plan did not require that the stock fund be offered at all, but did explicitly permit the plan to offer the fund as an option. At no time were participants required to invest in the stock fund.

The case had the usual elements of many of the company stock lawsuits: (1) Deterioration of the plan sponsor's financial position; (2) individuals holding officer or director positions who also served as fiduciaries of the plan; (3) typical claims against fiduciaries that the stock fund was an "imprudent" investment option and that fiduciaries made negligent misrepresentations and failed to disclose material information to participants. The plaintiffs also brought a complaint that the director-fiduciaries had failed to monitor the fiduciaries who had been appointed to the Committee monitoring the investments.

In denying the plaintiffs' Motion for Summary Judgment and granting the defendants' Motions for Summary Judgment, the court held as follows:

(1)  Regarding the plaintiffs' argument that the plan failed to meet ERISA Section 404(c) by not disclosing "in advance that liability would be shifted to Plaintiffs under the 404(c) plan", the court held that language in a prospectus satisfied that requirement.

(2) Regarding the plaintiffs' argument that the plan failed to meet 404(c) by not adequately describing the investment objectives and the “risk and return” characteristics of the investment options offered by the plan, the court pointed to a general benefits pamphlet which had been distributed to employees and contained a chart describing the investment alternatives.  The chart listed the investment choices and provided "short phrases describing the objectives and investment strategies of each one" including a ranking of the investments by risk from lowest to highest.  The court also noted another chart in the prospectus which tracked the annual return of the investment choices over the prior decade, disclosed the "best and worst single quarters of each fund" and described the riskiness of the company stock fund.  The court concluded that the chart in the benefits pamphlet when coupled with the prospectus "provided participants with ample information to make an informed decision."

(3)  The court held that the plaintiffs' negligent misrepresentation claims were not actionable under ERISA because the court said that, even if the defendants' were negligent, negligence is not enough in the Seventh Circuit to advance a claim under ERISA: 

First, the Seventh Circuit does not recognize merely negligent misrepresentation as a violation of ERISA. “[W]hile there is a duty to provide accurate information under ERISA, negligence in fulfilling that duty is not actionable.” Vallone v. CNA Fin. Corp., 375 F.3d 623, 642 (7th Cir. 2004). Plaintiffs’ citations to cases in other circuits are unhelpful, as the Seventh Circuit’s interpretation of the duty of loyalty is “narrower . . . than [the interpretations] in other circuits.” Id. Plaintiffs have not set out any evidence to suggest that Motorola “set out to disadvantage or deceive its employees,” and so a misrepresentation claim is misplaced. Id.

(4)  Regarding the allegation that the company stock fund was an "imprudent investment" offered by the fiduciaries as part of the investment menu provided to participants, the court followed the lead of the Hecker case and opined that ERISA Section 404(c) protects a fiduciary who "satisfies the criteria of [section 404(c)] and includes a sufficient range of options so that the participants have control over the risk of loss."  The court, like the Seventh Circuit in Hecker, declined to follow the footnote in the preamble to the DOL's 404(c) regulations which states that "the act of limiting or designating investment options which are intended to constitute all or part of the investment universe of an ERISA 404(c) plan is a fiduciary function which . . . is not a direct or necessary result of any participant direction of such plan.” Final Regulation Regarding Participant Directed Individual Account Plans (ERISA Section 404(c) Plans), 57 Fed. Reg. 46906, 46924 n.27 (Oct. 13, 1992).  Instead, the court noted that the language was "unconvincing" and a type of "informal commentary" by the agency which "cannot override the language of the statute and regulations.”

However, the court went even further, holding that even if the 404(c) defense were not available, the imprudent investment claim would fail on its merits: 

Plaintiffs’ claim that Defendants’ decision to continue offering the Motorola Stock Fund despite the coming problems with the Telsim loan was an imprudent one necessarily requires a finding that removing the Stock Fund from the Plan, or at least halting further investments in the Fund, would have been more prudent. But “[c]ourts must recognize that if the fiduciary, in what it regards as an exercise of caution, does not maintain the investment in the employer's securities, it may face liability for that caution, particularly if the employer's securities thrive.” Edgar v. Avaya, Inc., 503 F.3d 340, 349 (3d Cir. 2007) (quoting Moench, 62 F.3d at 571-72). This general principle that ERISA fiduciaries are not required to jump in and out of employer securities is fully applicable here. Indeed, as Plaintiffs own expert conceded, it “would be a pretty dangerous thing to do” for “the fiduciaries of a plan that has a single stock investment fund [to] open and close the fund depending on the short-term performance of that stock.”

One can read about how plan fiduciaries were sued over selling company stock before it rebounded in the Bunch v. W.R. Grace & Co. Savings and Investment Plan case discussed here.

Conclusion:  This is another victory for plan fiduciaries and is especially helpful for plan sponsors who offer company stock as an investment option.  While the case is in the Seventh Circuit and the court was bound to follow the lead of the Seventh Circuit in the Hecker case, the court's strengthening of the 404(c) defense in even the company stock context should provide some comfort for fiduciaries at least in the Seventh Circuit.  It remains to be seen how other circuits will view these decisions. 

Additional reading at these pages of the Guidebook:  

• Company Stock Litigation 

• 404(c) of ERISA

Part II of this post (discussing the court's holdings regarding the directors' duty to monitor) coming soon . . .