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News January 25, 2010 Issue

Supreme Court Refuses Review of 401(k) Plan Fiduciary Duty Case Against Sponsor and Adviser

As they say in opera and sports, it ain’t over until the fat lady sings.

We just might hear music.

Last week, the Supreme Court let stand a seventh circuit decision that rejected a breach of fiduciary duty claim against 401(k) plan sponsor Deere & Company and two Fidelity affiliates that provide services to the plan. In doing so, the seventh circuit decision now stands as precedent to be applied to several other similar cases that were also before that court.

Let’s take a little trip back into 2009.

The fee and revenue sharing case brought by the St. Louis-based law firm of Schlichter, Bogard & Denton alleged that the defendants’ failure to disclose certain revenue sharing arrangements breached actual and "functional" fiduciary responsibilities.

In the case, the Deere plan offered participants the option to invest in a series of Fidelity funds, a Deere-only stock fund, and any of 2,500 non-Fidelity funds. The Fidelity entity serving as trustee, in lieu of receiving fees directly from the plan for its services, took revenue-sharing payments from the Fidelity funds offered through the plan. Plan participants claimed that the Fidelity trustee was a functional fiduciary because it exercised "de facto" control over the plan’s offerings, and that Deere, as the plan’s sponsor and actual fiduciary, merely "rubber-stamped" Fidelity’s selections. Plan participants also alleged that the Fidelity fund offerings in the plan did not charge the lowest possible fees.

In rejecting those arguments this past June, the seventh circuit viewed the ERISA statute and regulations as setting a higher fiduciary standard than was met by Fidelity’s conduct, and as imposing less rigid standards of conduct on Deere, the actual fiduciary.

The seventh circuit rejected Department of Labor arguments that it was entitled to deference from the court for its interpretation of its own regulations under the statute. In this case, the interpretation would have imposed a higher standard of conduct on plan fiduciaries. DOL predicted that rejecting the plaintiffs’ claims would establish a defacto level of immunization from accountability for plan fiduciaries.

Such concerns were more "hypothetical than real," said the seventh circuit.

The simple fact of the matter, said the court, was that the decision to dismiss the appeal was limited to the contents of the complaint and materials properly before the lower court, which when assessed by Supreme Court pleading standards, didn’t measure up.

For example, said the seventh circuit, the complaint failed to discuss what services, if any, participants received from the plan. If it had, the court might have been able to assess whether the plan participants really were treated "exactly" like retail investors, as the plaintiffs alleged. Without more facts, the court emphasized, it was unable to infer more than the "mere possibility’ of misconduct, and the complaint didn’t show the plan participants were entitled to relief.

The Supreme Court appears to agree.

In a statement, Fidelity said: "We’re pleased to see that there’s final resolution in this case for both Fidelity and [Deere]. We continue to believe that we provide valuable service at a reasonable cost and that this decision was the correct one."

The door may still be open to future actions by plan beneficiaries, however.

At the time the seventh circuit decision was rendered, that court left open a determination of whether a safe harbor under ERISA Section 404(c) applies. The safe harbor, which requires a sponsor to advise plan participants that they are responsible for their investment decisions, may – or may not – shield a plan sponsor when selecting investment options for a plan.

The issue could be developed, said the seventh circuit, either "on the basis of a different set of pleadings, or on the basis of a regulation directed to this issue."

DOL may act to expressly clarify its regulation, or another case may be filed. Deere attorney and Morgan Lewis partner Sari Alamuddin said at the time that he thought plan participants pressing this type of complaint were in a "pickle."

Schlichter has also brought similar actions in other courts, including one filed this past summer against Edison International in the U.S. District Court for the Central District of California. That case has received class certification, but no decision has been rendered. California is in the ninth circuit. Should a case progress there, it could possibly establish a decision at odds with the seventh circuit analysis, and be ripe for Supreme Court review.