“Second” Opinion
ERISA’s 404(c) has long been held out by some as something of a magic talisman: Comply with its strictures, they claim, and you have an iron-clad defense against participant lawsuits —and, IMHO, the implication is a defense against ALL participant lawsuits. Of course, any number of ERISA experts will tell you that it is nearly impossible to satisfy those strictures, certainly not for every transaction (and mind you, 404(c) is transactional protection)—not that that seems to dissuade plan fiduciaries from trying, nor plan advisers from purporting to help them achieve that end. Nor are plan fiduciaries, or the participants and beneficiaries they support, ill-served by those efforts.
That said, I have long been surprised at how broadly the judiciary has been willing to extend those protections. Good news if you’re the plan sponsor getting sued, of course—but not-so-good if you’re a plan fiduciary looking for some consistency in the law.
The most recent example was Hecker v. Deere (see “Appellate Court Backs Deere Case Dismissal”), one of the litany of revenue-sharing lawsuits that have been brought (see “IMHO: Fighting Words”). This particular case has drawn the attention of the Department of Labor (DoL), and not for the first time. In fact, it was almost exactly a year ago that the DoL tried to help the appellate court do a better job applying the law than the District Court had (see “IMHO: The Letter of the Law”).
This time, the DoL said in a friend of the court filing that a “[p]anel rehearing is warranted to correct the panel’s mistakes of law and fact in misconstruing section 404(c ) of ERISA and declining to defer to the Secretary’s reasonable interpretation of her 404(c ) regulation.”
Besides the issue of deference to the Secretary of Labor, at issue in the DoL’s filing: “whether participants and beneficiaries exercise independent control,” but more specifically, did that exercise happen “in the manner described in the regulation,” because only then would the plan fiduciaries not be liable for any loss “that is the direct and necessary result” of that exercise of control.
The DoL cites language in 404(c)’s preamble that clearly puts the act of designating investment alternatives as well as the ongoing determination that those choices are “suitable and prudent” outside the shield of 404(c), and goes on to note footnote language that, IMHO, confirms the obvious—that the choice of those fund menu options is a task “over which the fiduciary, and not the participant has control”—and thus, even if the plan qualified as a 404( c) plan, those protections would not apply. Moreover, and at issue in the Deere case, the DoL notes, “[I]f on the other hand, the fiduciary maintains imprudent investment choices—such as investments with imprudently high fees (emphasis added)—then under the Secretary’s regulation, any resulting loss is not a ‘direct and necessary consequence of the participant’s exercise of control,’ and the fiduciary is not exempt from liability for that loss.”
The DoL notes that the court’s decision “appears to rest in large part on a mistaken impression that plaintiffs’ claims hinge on the fiduciaries’ failure to ‘scour the market to find and offer the cheapest possible fund,’ as well as the conclusion that the fees were necessarily prudent because the Plan’s array of investment funds were offered ‘to the general public’ at the same expense ratios that the Plans paid.” To the DoL’s point, it’s one thing to say that there is no obligation to find/obtain the cheapest fee, another altogether, IMHO, to claim that a multi-billion-dollar 401(k) plan has no fiduciary obligation to negotiate a better deal on behalf of its participants than they could do on their own account in a retail environment. To fail to do so is not necessarily a fiduciary transgression—but, IMHO, it surely is worth a proper hearing.
To its credit, the DoL didn’t just take issue with the fact that the court basically ignored its earlier counsel, nor did it focus strictly on its belief that the court just plain got it wrong, though it did say that “[t]he court also may not have fully understood the potentially far-reaching ramifications of its decision, which permits fiduciaries to evade accountability for the imprudent selection and maintenance of funds in defined contribution plans.”
The DoL also looked out to the future to see where a judicial misapplication of the law might take us and, I’m pleased to say, they cited this column (1). “These implications have not gone unnoticed,” the DoL said. “For instance, a commentator in PLANSPONSOR notes that if he were advising an employer with a 401(k) plan based on this decision he would ‘advocate giving participants LOTS of fund choices—via a brokerage window if possible,’ and would advise the employer that it ‘won’t have to worry about being prudent in the selection of the fund options for the plan because, according to [this Court’s] ruling, that [404(c)] safe harbor applies to that decision.’” The DoL then notes that “[e]ven if this Court meant to limit its holding to plans that offer a brokerage window of the type offered by the Deere plans…it is not hard to imagine that plan designers will advocate including this feature for all plans in order to immunize fiduciaries from any liability with respect to the selection of the plan’s option.”
Of course, the “counsel” I offered in that column was somewhat tongue in cheek. To me, it’s evident on the face of the matter that that would be an inappropriate result—and yet, as the DoL acknowledged by including the comment, you don’t need to reach very far from the court’s articulated rationale to arrive at that result.
In fact, the DoL has, consistently to my ears, and across administrations, said that, in the absence of 404(c)’s protection, plan fiduciaries are responsible for all plan investment decisions, even those made by well-informed, active, and engaged participants, even if that is further than many plan sponsors are willing to acknowledge.
That makes those protections all the more precious—and, with all due respect to the judges who consider these situations, all the more important that they get it right.
—Nevin E. Adams, JD
(1) IMHO: “Winning” Ways?
See also: IMHO: Letter of the Law
That said, I have long been surprised at how broadly the judiciary has been willing to extend those protections. Good news if you’re the plan sponsor getting sued, of course—but not-so-good if you’re a plan fiduciary looking for some consistency in the law.
The most recent example was Hecker v. Deere (see “Appellate Court Backs Deere Case Dismissal”), one of the litany of revenue-sharing lawsuits that have been brought (see “IMHO: Fighting Words”). This particular case has drawn the attention of the Department of Labor (DoL), and not for the first time. In fact, it was almost exactly a year ago that the DoL tried to help the appellate court do a better job applying the law than the District Court had (see “IMHO: The Letter of the Law”).
This time, the DoL said in a friend of the court filing that a “[p]anel rehearing is warranted to correct the panel’s mistakes of law and fact in misconstruing section 404(c ) of ERISA and declining to defer to the Secretary’s reasonable interpretation of her 404(c ) regulation.”
Besides the issue of deference to the Secretary of Labor, at issue in the DoL’s filing: “whether participants and beneficiaries exercise independent control,” but more specifically, did that exercise happen “in the manner described in the regulation,” because only then would the plan fiduciaries not be liable for any loss “that is the direct and necessary result” of that exercise of control.
The DoL cites language in 404(c)’s preamble that clearly puts the act of designating investment alternatives as well as the ongoing determination that those choices are “suitable and prudent” outside the shield of 404(c), and goes on to note footnote language that, IMHO, confirms the obvious—that the choice of those fund menu options is a task “over which the fiduciary, and not the participant has control”—and thus, even if the plan qualified as a 404( c) plan, those protections would not apply. Moreover, and at issue in the Deere case, the DoL notes, “[I]f on the other hand, the fiduciary maintains imprudent investment choices—such as investments with imprudently high fees (emphasis added)—then under the Secretary’s regulation, any resulting loss is not a ‘direct and necessary consequence of the participant’s exercise of control,’ and the fiduciary is not exempt from liability for that loss.”
The DoL notes that the court’s decision “appears to rest in large part on a mistaken impression that plaintiffs’ claims hinge on the fiduciaries’ failure to ‘scour the market to find and offer the cheapest possible fund,’ as well as the conclusion that the fees were necessarily prudent because the Plan’s array of investment funds were offered ‘to the general public’ at the same expense ratios that the Plans paid.” To the DoL’s point, it’s one thing to say that there is no obligation to find/obtain the cheapest fee, another altogether, IMHO, to claim that a multi-billion-dollar 401(k) plan has no fiduciary obligation to negotiate a better deal on behalf of its participants than they could do on their own account in a retail environment. To fail to do so is not necessarily a fiduciary transgression—but, IMHO, it surely is worth a proper hearing.
To its credit, the DoL didn’t just take issue with the fact that the court basically ignored its earlier counsel, nor did it focus strictly on its belief that the court just plain got it wrong, though it did say that “[t]he court also may not have fully understood the potentially far-reaching ramifications of its decision, which permits fiduciaries to evade accountability for the imprudent selection and maintenance of funds in defined contribution plans.”
The DoL also looked out to the future to see where a judicial misapplication of the law might take us and, I’m pleased to say, they cited this column (1). “These implications have not gone unnoticed,” the DoL said. “For instance, a commentator in PLANSPONSOR notes that if he were advising an employer with a 401(k) plan based on this decision he would ‘advocate giving participants LOTS of fund choices—via a brokerage window if possible,’ and would advise the employer that it ‘won’t have to worry about being prudent in the selection of the fund options for the plan because, according to [this Court’s] ruling, that [404(c)] safe harbor applies to that decision.’” The DoL then notes that “[e]ven if this Court meant to limit its holding to plans that offer a brokerage window of the type offered by the Deere plans…it is not hard to imagine that plan designers will advocate including this feature for all plans in order to immunize fiduciaries from any liability with respect to the selection of the plan’s option.”
Of course, the “counsel” I offered in that column was somewhat tongue in cheek. To me, it’s evident on the face of the matter that that would be an inappropriate result—and yet, as the DoL acknowledged by including the comment, you don’t need to reach very far from the court’s articulated rationale to arrive at that result.
In fact, the DoL has, consistently to my ears, and across administrations, said that, in the absence of 404(c)’s protection, plan fiduciaries are responsible for all plan investment decisions, even those made by well-informed, active, and engaged participants, even if that is further than many plan sponsors are willing to acknowledge.
That makes those protections all the more precious—and, with all due respect to the judges who consider these situations, all the more important that they get it right.
—Nevin E. Adams, JD
(1) IMHO: “Winning” Ways?
See also: IMHO: Letter of the Law
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