Excessive Fund Fees Case
Rev. 03/11/09; E-mail Alert 2009-4

Last month the U.S. Court of Appeals for the Seventh Circuit upheld a district court’s dismissal of all claims against Deere & Company, Fidelity Management & Research Company, and Fidelity Management Trust Company in Hecker v. Deere & Company.  The allegations in this case were improper revenue sharing between service providers and excessive investment fees associated with Deere’s two 401(k) plans. 

Dennis Hecker and several other Deere plan participants were represented by Schlicter, Bograd & Denton LLP, a firm that has filed several class action lawsuits against corporations and their ERISA plans.  Deere is the sponsor and fiduciary of the plan, Fidelity Management & Research Company serves as the plan’s investment manager, and Fidelity Management Trust Company is both the record keeper and directed trustee.

The plans offered 23 Fidelity mutual funds, a Deere stock fund, two investment funds managed by Fidelity Trust, and a brokerage account option that allowed participants to invest in 2,500 non-Fidelity mutual funds.  The expense ratios of the 20 primary funds ranged from just over 1% to as low as .07%.  Instead of Fidelity Trust directly charging fees to Deere, Fidelity Research shared its mutual fund fee revenue with Fidelity Trust to cover the record keeper and trustee plan expenses.

The plaintiffs accused Deere, Fidelity Research, and Fidelity Trust of violating their fiduciary duties under ERISA by providing investment options that had excessive fees and costs.  Both Fidelity Research and Fidelity Trust were accused of violating their fiduciary duties by allowing for an improper revenue sharing arrangement, and Deere was alleged to have breached its fiduciary duties for failing to inform the participants of Fidelity’s revenue sharing arrangement.

Prior to considering the claims that the defendants violated their fiduciary duties, the court addressed the fiduciary status of both Fidelity Research and Fidelity Trust.  The Seventh Circuit found that both entities of Fidelity did not function as plan fiduciaries; therefore, the charges against them were dismissed.  Fidelity Research was deemed to have not exercised control over the plan’s investment options, since Deere had the final decision over which investments were added to the plans.  The court also disagreed with the claim that both Fidelity entities were fiduciaries by having control over the plan assets and determining their revenue sharing arrangement of the fund fees, noting that the fees were not considered plan assets once they were paid to the mutual funds.

After dismissing the complaints against both Fidelity defendants, the court looked at whether or not Deere had violated any of its fiduciary duties.  Deere was found to have fulfilled its ERISA disclosure requirements by providing participants with information about the total fees associated with the various plan investments.  The court also found that Deere had offered participants an acceptable selection of investment options with a wide range of expense ratios, therefore, there was no fiduciary breach relating to choosing funds with excessive fees.  It was noted that ERISA does not require plan fiduciaries to offer the cheapest funds, and there is no regulation preventing an employer from choosing plan investments from a single provider.

This case was first filed in late 2006, and dismissed by a district court in Wisconsin in June of 2007.  Over the course of the past several years there has been an increased interest in the topic of fee disclosure within qualified retirement plans, and similar cases exist which could be affected by the outcome of Hecker v. Deere & Company.  The Department of Labor (DOL) had proposed new rules surrounding fee disclosure, which could lead to more fee transparency within the industry. The Court noted that as this was only proposed recently, it had not been required at the time covered by the suit.  The proposed regulations were never finalized by the Bush Administration and their status is not clear based on positions taken by the Obama Administration regarding Bush regulations that did not make it through the finalization process.

The Court found the employer's plan to be compliant with ERISA 404(c).

The Court awarded costs of $54.396.57 for Deere and $163,814.43 for the two Fidelity defendants.

Bill Grossman, ERPA, QPA

To learn more, call 973-492-1880 or e-mail info@mhco.com.