The U.S. Supreme Court's refusal to review a 401(k) fee lawsuit involving Deere & Co. and two Fidelity Investment units should not be interpreted as a sign favoring Deere and other plan sponsors, according to ERISA attorneys.
In fact, attorneys said the high court still might agree to review one of the more than a dozen pending excess-fee cases — and then rule in the plaintiff's favor.
The Supreme Court, the attorneys said, only agrees to review about 80 of the thousands of appeals filed each year, generally rejecting without comment all but the most controversial cases. The attorneys also said the high court often only agrees to review cases when a wide range of conflicting opinions has been issued on the topic by the federal appeals courts.
“Just because the Supreme Court denies certiorari now, it means nothing,” said Marcia Wagner, an ERISA attorney with The Wagner Law Group, Boston.
In the meantime, ERISA lawyers and pension industry lobbyists agreed a series of recent pro-plaintiff developments in lawsuits alleging excessive defined contribution plan fees is expected to spur the filing of additional court challenges.
Among key recent developments:
A federal judge on Dec. 17 allowed a class-action lawsuit by participants in Kraft Foods Global Inc.'s 401(k) retirement plans that claimed plan fiduciaries overpaid investment management fees and provided underperforming investment options.
The 8th U.S. Circuit Court of Appeals in St. Louis on Nov. 25 overturned a lower court ruling that had thrown out a class-action lawsuit claiming Wal-Mart Stores Inc. used retail mutual funds that charged excessive fees for management of its $10 billion 401(k) plan.
Caterpillar Inc., Peoria, Ill., announced Nov. 5 that it had agreed to pay $16.5 million to participants in its four 401(k) plans with a combined $5 billion to settle a lawsuit alleging participants paid excessive fees.
With the Caterpillar case, plan sponsors worry that it sends the signal that other companies might be willing to pay off plaintiffs alleging excessive fees.
“I don't think it (the Caterpillar settlement) communicates anything about the merits (at issue in the lawsuit) but that the excess-service-provider-fee theory may be viable as a business model for plaintiff's lawyers,” said Jim Baker, a partner in the law firm Winston & Strawn LLP, Chicago.
“There's going to be more of these cases, because the plaintiffs have had some success,” Mr. Baker continued.
“Employee benefits, as noted by the plaintiff's bar, have become the new tobacco,” added Mark Ugoretz, president of the ERISA Industry Committee, Washington.
Attorneys agree the message from all the legal activity for defined contribution plan sponsors is simple: proceed with caution.
“The plan sponsor is absolutely standing naked,” said Larry Medin, president of Avatar Associates LLC, a New York-based money manager. “Plans need to be transparent, low cost and non-conflicted,” he added.
Said Judy Schub, managing director of the Committee on Investment of Employee Benefit Assets, Bethesda, Md.: “You have to review your processes to be sure they are sensible and documented; you have to periodically review all of your arrangements to make sure they are still in the interests of participants.
“Unfortunately, even if you do everything right, large plans are still a target for lawsuits because they have deep pockets,” Ms. Schub said.
“There is a group of lawyers out there searching for myriad ways to sue plan sponsors on the theory that they will get paid off,” said ERIC's Mr. Ugoretz.
Jason Bortz, an ERISA attorney for the law firm Davis & Harman LLP, Washington, said the “noise” from all the attention at the DOL and on Capitol Hill from the fee suits has already had a huge impact on defined contribution plans.
“Plan fiduciaries are more vigilant than ever about negotiating good fee arrangements,” Mr. Bortz said.
In the Deere case, the Supreme Court declined to review an order from February 2009 affirming a lower court decision that had dismissed the suit against the tractor maker and Fidelity, which serves as the 401(k) plan's directed trustee and record keeper. The Deere plan also offers Fidelity mutual funds as investment options.
The original suit by plan participants claimed that Deere, Fidelity Management Trust Co. and Fidelity Management & Research Co. violated their fiduciary duties by charging unreasonable fees for investment options in the $3.1 billion 401(k) plan.
In the original complaint, Deere plan participants alleged that the company failed to negotiate the lowest possible fees for plan participants under an arrangement in which most of the plan's investment options were Fidelity funds. In addition, Deere officials allegedly failed to disclose or were unaware of a revenue-sharing arrangement that Fidelity was using to share some of the asset-based investment fees it was getting from plan participants with a Fidelity affiliate.
In his June 2007 decision, U.S. District Court Judge John C. Shabaz said Deere was protected from fiduciary responsibility by a provision in the Employee Retirement Income Security Act that provides safe harbor for plans that comply with its Section 404(c) regulations. That provision requires the plan sponsor to advise plan participants that they are responsible for their own investment decisions.
Mr. Shabaz also said Department of Labor regulations do not require disclosure of revenue-sharing arrangements.
