Saturday, July 11, 2009

The "Burden" of Proof

Recently the 7th Circuit responded to requests that it reconsider its opinion in the revenue-sharing/”excessive fee” case of Hecker v. Deere (see “7th Circuit Panel Limits Ruling’s 404(c) Effects”). The case, of course, was one of the earliest in the litany of those cases to be filed in 2006, and the only one (thus far) to reach the appellate level.

To date, the courts have, with little exception, dispensed with these cases harshly. Not that they aren’t entitled to do so, of course, and not that this particular generation of filings isn’t deserving of such treatment, IMHO. From the beginning, the plans targeted seemed better-designed to fill the pockets of plaintiffs’ counsel, if for no other reason than large employers frequently figure that it’s cheaper to settle than to fight (see “IMHO: Fighting Words”). That said, the courts—including the 7th Circuit—seem to have a more “generous” view of what it takes to earn the protections of ERISA 404(c) than most ERISA lawyers I know.

I was no less confused by the 7th Circuit’s response to the request for a rehearing (see “7th Circuit Panel Limits Ruling’s 404(c) Effects” ). Basically, the court said that there had been no judicial call for such reconsideration, and that, in fact, the judges who made the original determination had voted to deny the petition for reconsideration. However, the judges apparently felt the need to respond directly to some of the charges made in the amicus curiae briefs filed in support of the motion—and, perhaps more significantly, it took pains to point out that its ruling in the case, and on the facts presented, shouldn’t be applied too broadly. And that, of course, seems to have been a source of solace and comfort to the folks who have brought us these revenue-sharing lawsuits, who have reason to feel “down” (based on the limited adjudications to date), but are apparently not “out.”

Now, I didn’t mind that the courts have held there is no fiduciary duty to disclose fees to participants (there isn’t), nor the determination that plan sponsors need not scour the marketplace to find the cheapest investment choices (cheapest might not even be “reasonable”). But, having spent some reasonable part of my adult life trying to understand and help others understand the scope, implications of, and limitations to ERISA 404(c), I’ve generally been puzzled at how liberally the courts have been willing to apply its protections, certainly in contrast to the position espoused by the Department of Labor (which, I should add, has been remarkably consistent in its voice on the subject).

That said, in its response, the 7th Circuit spoke to the issue raised in this space previously—and acknowledged in the petitions of the DoL and plaintiffs for a rehearing (see “IMHO: ‘Second’ Opinion”):

“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," the court asserted. “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.”

It is that last sentence that now gives comfort to those pursuing these actions in other venues (venues that might have been inclined to toss those claims, citing the 7th Circuit’s decision), and one that, for the moment anyway, may assuage the DoL’s concerns.

But as I read the original decision, I saw a causal connection created by the court that suggested that there was no cause of action because the plan was protected under the shield of ERISA 404(c), a shield the court felt the plan was entitled to in no small part because the plan had provided the array of options outlined.

I, for one, would have been perfectly content if the court had held that it wasn’t sufficient to establish a fiduciary breach claim by just stating that the plan offered retail-priced mutual funds (even from a single fund family), particularly when that was offered alongside a brokerage window that provided participants access to investments beyond that core menu. One can argue that a plan the size of Deere’s could have negotiated a better deal for its participants, or that it perhaps would have been better-served to offer a more diversified menu than a single set of proprietary funds—but I think the court would have been comfortably within its purview to say that you need more than a simple insinuation that that arrangement is a violation on its face to bring a case in federal court.

What puzzled me then—and puzzles me still—is that the court apparently felt it necessary to invoke the safe harbor protections of ERISA 404(c) to, effectively, justify its conclusion. For, while there are any number of casual 401(k) plan adviser/consultants out there who will tell a plan sponsor that all they have to do to earn those protections is to offer a lot of funds, let participants transfer between those funds at least quarterly, give those participants prospectuses on those funds—oh, and file their intent to function as a 404(c) plan—there’s more to it than that, and we trust that the courts are as aware of that as any ERISA prudent expert.

Personally, I would have preferred that the 7th Circuit restated its rationale—clarify that, while they chose to invoke 404(c ), it wasn’t necessary to do so; clarify that the plaintiffs simply hadn’t established a case sufficient to go to trial.

And reminded us all that, while the standards ERISA fiduciaries are held to are demanding, so are the standards for asserting that that duty hasn’t been fulfilled.

—Nevin E. Adams, JD

See also:

Appellate Court Backs Deere Case Dismissal

IMHO: “Second” Opinion

IMHO: “Winning” Ways?

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