Law Professor Amicus Brief Filed in 7th Circuit ERISA Case

Today, as part of a group of law professors around the country with interests in the mutual funds and employee benefits area, I helped to draft and signed on to an amicus brief which asked for the Seventh Circuit Court of Appeals to grant rehearing en banc in the ERISA case of Hecker v. Deere & Company.  The case concerns an issue of tremendous importance for American workers’ retirements: the appropriate scope of a fiduciary duty under ERISA in the context of personal savings and mutual fund fees.

In Hecker, a 7th Circuit panel affirmed the decision of the district court of the Western District of Wisconsin, which found a group of employee-plaintiffs did not state a claim for relief under ERISA when their employer, Deere, allegedly did not provide a sufficient menu of mutual fund options for their 401(k) retirement plan accounts.  Although the brief argued in part that the panel inappropriately adopted a remarkably narrow interpretation of fiduciary duty that relied crucially upon an assumption that the underlying market for mutual funds is vibrant and competitive, my part of the brief involved the proper fiduciary standard for employers who run 401(k) accounts under so-called 404(c) plans.

More specifically, we argued that the panel’s decision in Hecker drastically overstated the proper scope of the § 404(c) safe harbor for fiduciaries of 401(k) plans under ERISA and thereby threatens to undermine the ability of tens of millions of Americans to save effectively for their retirements.    This is because ERISA requires “care, skill, prudence, and diligence” on the part of a fiduciary to select a suitable menu of investments, not to select a small number of expensive options or to make essentially no selection at all.

And although it is true that ERISA § 404(c) eliminates fiduciary responsibilities for plan administrators to the extent participants direct how their pension fund assets are invested, it does not touch the obligation of fiduciaries to prudently select and monitor the menu of possible plan investments.  Yet, the Hecker panel concluded on mere pleadings that, “even if § [404(c)] does not always shield a fiduciary from an imprudent selection of funds under every circumstance that can be imagined, it does protect a fiduciary that satisfies the criteria of § 1104(c) and includes a sufficient range of options so that the participants have control over the risk of loss.”  This conclusion misstates ERISA law, as interpreted by the DOL, and insulates ERISA fiduciaries from liability for assembling an imprudent menu of investment choices for employees in the first instance.  We thus urge the panel to grant  en banc rehearing and deny the defendants’ motion to dismiss.

This Post Has 7 Comments

  1. Nick Paleveda

    I read the AC Brief but the brief was not specific as to “what the abuse was exactly”. I heard “fees are bad”. What fees? How much?-how did they differ from the market? What was the standard deviation from the market? Did the MF company charge 20% of the profits plus 2% of AUM like hedge funds?

    Nick Paleveda MBA J.D. LL.M

  2. Paul M. Secunda


    The abuse was not following their fiduciary duties to make sure the investment options for the 401(k) plan were prudent and appropriate for the purposes of providing retirement benefits for employee/participants. The issue here was not the range of investment mutual funds fees per se (there was a broad range), as there was no filtering done at all – some 2500 funds were available without any indication that the company and its administrator went through these funds with its fiduciary obligations to the employees in mind. The process is what’s important under ERISA fiduciary law.

  3. Paul, sorry I don’t get it-why should a plan sponsor be liable as an “investment guru” for their employees. Frankly, many employers would say forget the 401(k)-which they should do so anyway as it is a tax inefficient investment with a 15.3% load in most cases. If you add on their “deemed fidicuairy duty”. I think a decision by the court to hold sponsors liable should be an indication to business owners to terminate what is an inefficient oversold plan to begin with for the company.-the “load” is of course SS and Medicare taxes-which in a Db or PS plan is avoided.

  4. I am also curious about the signers of the amici, how many have actually talked to plan sponsors-and how many have they actually talked to sponsors about these plans. I personally have had discussions with over 1,000 plan sponsors and 1500+ plan participants-a different viewpoint from these plan sponsors many who struggle to provide health and retirement benfits to their employees in a down economy. In most cases, the employees go home at 5-employers in many cases will not have that luxury. Yes, they may make more money, but what do you expect in an 80 hour work week-as opposed to 40….

  5. Mike Sladky-retirement advisor

    Dear Paul-

    How do you know that Deere & Co did not follow a prudent process when selecting the core investment options? There were 20 well diversified offerings–some with low fees as well—-and there has been very little commentary from the ERISA pundits and the 404c specialists since the 7th Circuit refused a re-hearing.

  6. Thanks Mike, the 7th Circuit did the right thing and dumped this case in the trash can. Many participants are unaware of the huge amount of rules and regulations that ERISA imposes on plan sponsors. The IRS in many cases is overzealous in imposing fines and penalties on plan sponsors making it almost a crime to save for retirement. The last thing we need is overzealous plaintiff’s attorneys filing suits against plan sponsors. Has anyone on this blog actually administered a plan? Dealt with the DOL and IRS on a plan? Filed compliance reports such as 5500s, PBGC-1, Form 500, 501? Actually been involved in plan audits-fought against 6707A-(a huge unconstitutional statute?)-read it it reeks with tyranny-no judicial review????? Probably not. Instead if a participant has too few mutual fund choices it is a breach of fiduciary duty by the plan sponsor. If participants have too many options (there is already a case filed on this issue) it is a “breach of fiduciary duty”. I think the fidcuary duty of plan sponsors should be simular to AAA arbitrators-which is basically none. ( If you have ever been in front of an AAA arbitrator, you will find out how corrupt they can be with no recourse for your client)-no real standards.

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