Appellate Court Backs Deere Case Dismissal

February 12, 2009 ( - Chock up another win for a plan sponsor in the litany of revenue-sharing suits filed in 2006.

class=”NoSpacing”> The most recent case – a federal appeals court who has now upheld a district court’s dismissal of a lawsuit filed against Deere & Co., Fidelity Management Trust Company, and Fidelity Management and Research Company alleging breach of fiduciary duties in regards to retirement plan fee disclosures at two 401(k) plans sponsored by the company (see ” Deere and Fidelity Fee Lawsuit Thrown Out “).

class=”NoSpacing”> The original lawsuit was brought by several employees against Deere, Fidelity Management Trust Company, the directed trustee and recordkeeper for the two Deere plans (which also managed two investments available to plan participants under the plan), and Fidelity Management & Research Company, the investment advisor for the mutual funds offered as investment options under Deere’s plans (see ” Deere Workers Hit Fidelity with Excessive 401(k) Fee Suit” ).   And, as in that case, Judge Diane P. Wood of the 7th U.S. Circuit Court of Appeals concluded “that the district court correctly found that plaintiffs failed to state a claim against any of the defendants, and we therefore affirm the district court’s judgment.”

class=”NoSpacing”> The court also affirmed the district court awards of $54,396.57 to Deere and $163,814.43 to Fidelity.

class=”NoSpacing”> Main Issues

class=”NoSpacing”> Two of the main issues addressed by Judge Wood were whether the district court answered correctly the following questions:

class=”NoSpacing”> 1. Were the Fidelity defendants “functional” fiduciaries of the plans with respect to the selection of investment options, the structure of the fees, or the provision of information regarding the fee structure?

class=”NoSpacing”> 2. Did Deere breach its fiduciary duty by not informing the plan participants that Fidelity Trust received money from the fees collected by Fidelity Research and did it imprudently limit the investment options to Fidelity research funds, only then offering investment options with excessively high fees?

class="NoSpacing"> Regarding the functional fiduciary question, in order for Fidelity Trust or Fidelity Research to be functional fiduciaries, Wood wrote, they must have exercised discretionary authority or control over the management of the plans, the disposition of plan assets, or the administration of the plan. Wood agreed with the lower court that the Fidelity units did not meet that criteria.

class="NoSpacing"> "The Trust Agreement gives Deere, not Fidelity Trust, the final say on which investment options will be included [in the plan]," Judge Wood noted in the opinion.   And while the plaintiffs alleged that Fidelity Trust "played a role in the selection of investment options", the appellate court did not view that role in the same light: "Merely 'playing a role' or furnishing professional advice is not enough to transform a company into a fiduciary…. There is an important difference between an assertion that a firm exercised 'final authority' over the choice of funds, on the one hand, and an assertion that a firm simply 'played a role' in the process, on the other hand."

class="NoSpacing"> Exercise of Discretion

class="NoSpacing"> Regarding the plaintiffs' argument that the Fidelity units exercised discretion over plan assets by determining the revenue sharing arrangements between Fidelity Research and Fidelity Trust, Wood noted that "once the fees are collected from the mutual fund's assets and transferred to one of the Fidelity entities, they become Fidelity's assets—again, not the assets of the Plans."

class="NoSpacing"> In addressing the second question, Wood affirmed the district court's finding that the arrangement described in the complaint, where Fidelity Trust recovered costs through a revenue sharing arrangement with Fidelity Research, and where Fidelity research assessed asset-based fees against mutual funds and then transferred some of that money to Fidelity Trust, violated no statute or regulation.

class="NoSpacing"> "As Deere and Fidelity both point out and the Complaint acknowledges, the participants were told about the total fees imposed by the various funds, and the participants were free to direct their dollars to lower-cost funds if that was what they wished to do…. How Fidelity Research decided to allocate the monies it collected (and about which the participants were fully informed) was not, at the time of the events here, something that had to be disclosed," Wood stated. "The only question is thus whether the omission of information about the revenue-sharing arrangement is material. Deere disclosed to the participants the total fees for the funds and directed the participants to the fund prospectuses for information about the fund-level expenses. This was enough."


class="NoSpacing"> As for whether Deere was imprudent in limiting options to only Fidelity funds, "we find no statute or regulation prohibiting a fiduciary from selecting funds from one management company…many prudent investors limit themselves to funds offered by one company and diversify within the available options." Wood noted that the plans directly offered 26 investment options, including 23 retail mutual funds, and offered access to 2,500 non-Fidelity funds through a brokerage window.

class="NoSpacing"> Regarding the cost of the funds, Wood pointed out that plans offered investments with a wide range of expense ratios, from .07% to more than 1%. "The fact that it is possible that some other funds might have had even lower ratios is beside the point; nothing in ERISA requires every fiduciary to scour the market to find and offer the cheapest possible fund (which might, of course, be plagued by other problems)," she wrote.

Additionally, with regard to whether the fees charged were reasonable, Judge Wood noted that "It is untenable to suggest that all of the more than 2500 publicly available investment options had excessive expense ratios."   Even then, Judge Wood, invoking the protections extended to fiduciaries under ERISA's Section 404(c), noted "The only possible conclusion is that to the extent participants incurred excessive expenses, those losses were the result of participants exercising control over their investments within the meaning of the safe harbor provision."

class="NoSpacing"> Case Origins

class="NoSpacing"> The case was originally dismissed by The U.S. District Court for the Western District of Wisconsin on June 20, 2007.  It was one of severalfiled by the law firm Schlichter Bogard & Denton (see  Law Firm Launches Lawsuits Over 401(k) Fees ).


class="NoSpacing"> The appellate court decision is online  HERE .