Hecker v. Deere & Co., 07-3605.

• Decision Date: 12 February 2009
• Docket Number: No. 07-3605.,No. 08-1224.,07-3605.,08-1224.
• Citation: 556 F.3d 575
• Parties: Dennis HECKER, et al., Plaintiffs-Appellants, v. DEERE & COMPANY, Fidelity Management Trust Co., and Fidelity Management & Research Co., Defendants-Appellees.
• Court: U.S. Court of Appeals — Seventh Circuit

556 F.3d 575

Dennis HECKER, et al., Plaintiffs-Appellants, v. DEERE & COMPANY, Fidelity Management Trust Co., and Fidelity Management & Research Co., Defendants-Appellees.

No. 07-3605.

No. 08-1224.

United States Court of Appeals, Seventh Circuit.

Argued September 4, 2008.

Decided February 12, 2009.

Elizabeth J. Hubertz, Attorney, Washington University School of Law, Jerome J. Schlichter, Attorney (argued), Schlichter, Bogard & Denton, St. Louis, MO, Jennifer L. Amundsen, Attorney, Solheim, Billing & Grimmer, Madison, WI, for Plaintiffs-Appellants.

Charles C. Jackson, Attorney (argued), Morgan, Lewis & Bockius, Chicago, IL, Robert N. Eccles, Attorney, Walter E. Dellinger, Attorney (argued), O'Melveny & Meyers, Washington, DC, James Fleckner, Attorney Goodwin Proctor, Boston, MA, for Defendants-Appellees.

Thomas Leon Cubbage, III, Attorney, Covington & Burling, Washington, DC, Robin Springberg Parry, Attorney (argued), Dept. of Labor Washington, DC, Amicus Curiae.

Before MANION, WOOD, and TINDER, Circuit Judges.

WOOD, Circuit Judge.

Even before the stock market began its precipitous fall in early October 2008, litigation over alleged mismanagement of defined contribution pension plans was becoming common. This type of litigation received a boost when, in LaRue v. DeWolff, Boberg & Associates, Inc., ___ U.S. ___, 128 S.Ct. 1020, 169 L.Ed.2d 847 (2008), the Supreme Court held that "a participant in a defined contribution pension plan [may] sue a fiduciary whose alleged misconduct impaired the value of plan assets in the participant's individual account." 128 S.Ct. at 1022. Section 502(a)(2) of the Employee Retirement Income Security Act of 1974 ("ERISA"), 29 U.S.C. § 1132(a), provides the basis for such an action.

The present case requires us to look further into two questions: first, how broadly does the concept of actionable misconduct sweep, and second, does someone who serves as the manager and investment advisor for a 401(k) plan, or for some of the plan's investment options, owe fiduciary duties to the sponsor's employees. These questions arise in a lawsuit brought by some employees of Deere & Company, which sponsors two 401(k) plans relevant to this case. Fidelity Management Trust Company ("Fidelity Trust") is the directed and recordkeeper for the Deere plans; it also manages two of the investment vehicles available to plan participants. Fidelity Management & Research Company ("Fidelity Research") is the investment advisor for the mutual funds offered as investment options under Deere's plans.

Named plaintiffs Dennis Hecker, Jonna Duane, and Janice Riggins ("the Hecker group"), seeking to sue both on their own behalf and for a class of plan participants, asserted in their second amended complaint ("Complaint") that Deere violated its fiduciary duty under ERISA by providing investment options that required the payment of excessive fees and costs and by failing adequately to disclose the fee structure to plan participants. The Hecker group also sued Fidelity Trust and Fidelity Research on the theory that they were functional fiduciaries for the class and thus they too were liable under § 1132(a). All three defendants moved to dismiss for failure to state a claim, see FED.R.CIV.P. 12(b)(6). The district court concluded that the case could be resolved at that preliminary stage, granted the motions to dismiss without resolving the class certification motion, and entered judgment for the defendants. Later, the court also denied plaintiffs' motion under Rule 59(e). We conclude 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.

I

A

In 1990, Deere engaged Fidelity Trust to serve as trustee of two of the 401(k) plans ("the Plans") it offers to its employees. The Plans, everyone agrees, are subject to ERISA, and the three named plaintiffs are participants in them. Under its arrangement with Deere, Fidelity Trust was required to advise Deere on what investments to include in the Plans, to administer the participants' accounts, and to keep records for the Plans.

Each Plan offered a generous choice of investment options for Plan participants: the menu included 23 different Fidelity mutual funds, two investment funds managed by Fidelity Trust, a fund devoted to Deere's stock, and a Fidelity-operated facility called BrokerageLink, which gave participants access to some 2,500 additional funds managed by different companies. Fidelity Research advised the Fidelity mutual funds offered by the Plans. Each plan participant decided for herself where to put her 401(k) dollars; the only limitation was that the investment vehicle had to be one offered by the Plan. Each fund included within the Plans charged a fee, calculated as a percentage of assets the investor placed with it. The Hecker group alleges that Fidelity Research shared its revenue, which it earned from the mutual fund fees, with Fidelity Trust. Fidelity Trust in turn compensated itself through those shared fees, rather than through a direct charge to Deere for its services as trustee. As the Hecker group sees it, this led to a serious—in fact, impermissible— lack of transparency in the fee structure, because the mutual fund fees were devoted not only to the (proper) cost of managing the funds, but also to the (improper) cost of administering Deere's 401(k) plans.

Distressed primarily by the fee levels, the Hecker group filed this suit individually and on behalf of a class against Deere, Fidelity Trust, and Fidelity Research, asserting that all three defendants had breached their duties under ERISA. The second amended complaint is the version on which the district court based its ruling. Paragraph 11 summarizes the plaintiffs' theory as follows: "... the fees and expenses paid by the Plans, and thus borne by Plan participants, were and are unreasonable and excessive; not incurred solely for the benefit of the Plans and the Plans' participants; and undisclosed to participants. By subjecting the Plans and the participants to these excessive fees and expenses, and by other conduct set forth below, the Defendants violated their fiduciary obligations under ERISA."

As we have already noted, Deere appointed Fidelity Trust to be trustee of the Plans. Fidelity Trust also performed administrative tasks for the Plans and managed two of the investment options available to the participants. Deere and Fidelity Trust agreed that Deere would limit the selections available to Deere's employees to Fidelity funds, with the exception of the Deere Common Stock Fund and some other minor guaranteed investment contracts. Fidelity Research served as the investment advisor for 23 out of the 26 investment options in the Plans. None of the Fidelity Research funds operated exclusively for Deere employees; all were available on the open market for the same fee. The Complaint alleges that Fidelity Research "maintains an active Revenue Sharing program, charging more for its services than it expects to keep in order to have additional monies with which to pay its affiliates and business partners." Those charges, plaintiffs allege, were excessive and unreasonable. Deere, in their view, failed to monitor Fidelity Trust's actions properly and failed to keep the participants properly informed.

A few more details about the Plans themselves are helpful. One plan was called the Savings & Investment Plan, or SIP, and the other was the Tax Deferred Savings Plan, or TDS. For all practical purposes, they operated the same way. Qualified employees could contribute up to a certain amount of their pre-tax earnings, and Deere would match those contributions in varying percentages up to 6%. Deere also made profit-sharing contributions on behalf of some participants. All participants were fully vested from the start with respect to their own contributions and were vested after three years' service with respect to the Deere contribution. By the end of 2005, the SIP had more than $2 billion in assets; more than $1.3 billion of that was held in Fidelity retail mutual funds. The TDS had more than $500 million in assets by that time, $244 million of which were held in Fidelity retail mutual funds.

B

Almost twenty years ago, the Supreme Court observed that "ERISA abounds with the language and terminology of trust law." Firestone Tire and Rubber Co. v. Bruch, 489 U.S. 101, 110, 109 S.Ct. 948, 103 L.Ed.2d 80 (1989). The Act's fiduciary responsibility provisions, found at 29 U.S.C. §§ 1101-14, are central to the Hecker group's case. Plaintiffs begin with § 1103(c)(1), which says that, except as provided in certain other parts of the statute, "the assets of a plan shall never inure to the benefit of any employer and shall be held for the exclusive purposes of providing benefits to participants in the plan and their beneficiaries and defraying reasonable expenses of administering the plan." Plan fiduciaries must discharge their duties "solely in the interest of the participants and beneficiaries." 29 U.S.C. § 1104(a)(1). Section 1104 recognizes an exception to that duty, however, for plans that delegate control over assets directly to the participant or beneficiary. The key language reads as follows:

(c) Control over assets by participant or beneficiary

(1)(A) In the case of a pension plan which provides for individual accounts and permits a participant or beneficiary to exercise control over the assets in his account, if a participant or beneficiary exercises control over the assets in his account (as determined under regulations of the Secretary)—

(i) such participant or beneficiary shall not be deemed to be a fiduciary by reason of such exercise, and

(ii) no person who is otherwise a fiduciary shall be liable under this part for any loss, or by reason of any breach, which results from such participant's or beneficiary's exercise of control, except that this clause shall not apply in...