Seventh Circuit Court of Appeals Commentary : In Their Opinion : Lawyer & Attorney Michael E. Rigney : Kelley Drye & Warren Law Firm

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HECKER v. DEERE & COMPANY (February 12, 2009)

Deere & Co. sponsors 401(k) plans for its employees. It engaged Fidelity Management Trust Co. (“Trust”) to serve as trustee of two of the plans. Trust administered employees’ accounts, maintained records, and advised Deere regarding investment options to include in the plans. Both plans offered many different investment choices – Fidelity mutual funds, two investment funds managed by Trust, a Deere stock option, and an option that provided a link to over 2500 funds managed by different companies. The plan’s participants managed their own funds from among the choices. Each of the funds imposed a percentage of assets fee upon participants. Fidelity Management & Research Co. (“Research”) is the investment advisor for the Fidelity mutual funds. Research earned revenue from the mutual fund fees and shared it with Trust. Trust’s only compensation for managing Deere’s plans was the fee from Research. Dennis Hecker and other plan participants brought this class action against Deere, alleging that Deere violated its fiduciary duty under ERISA by providing options in the plans that charged excessive fees and by not disclosing the fee structure between Trust and Research. Hecker also sued Trust and Research as functional fiduciaries. The district court granted defendants’ motions to dismiss without addressing the class issue. Hecker appeals.

In their opinion, Judges Manion, Wood and Tinder affirmed. The Court addressed several issues on appeal:
     1) Defendants’ motions to dismiss included hundreds of pages of documents related to the plans. The documents were either referred to in the complaint or were publicly available. The Court rejected Hecker’s argument that the district court improperly considered documents outside the complaint. The documents were used only to show the disclosures that had been made to plaintiffs. The district court was within its discretion to consider them without converting the motion to one for summary judgment.
     2) Deere admits that it owed some fiduciary duties to plaintiffs. Trust and Research, however, deny that they are fiduciaries. The district court agreed. Hecker argues only that they are “functional fiduciaries.” In order to be a functional fiduciary, the Court stated, one must exercise some discretionary management or control over the plan. The Hecker complaint alleged that Trust and Research “played a role,” not that they exercised control. The Court held Hecker to his complaint and rejected his attempts to change his theory on appeal.
     3) Even if Deere left an inaccurate impression that it was paying for the management of the fund, the Court agreed with the district court that there was nothing illegal about the revenue sharing agreement described in the complaint. The participants were fully informed of the amount of fees imposed by each fund and were free to direct their assets to whichever fund they chose. In order for there to be a breach of a fiduciary duty, there must have been a material omission. How Research distributed its fee is not material to plaintiffs – and they cannot make out a breach of fiduciary duty claim for that omission.
     4) Hecker also asserts that Deere breached its fiduciary duty by selecting investment options with excessive fees. The Court held that no rational trier of fact could conclude that Deere failed to offer a sufficient array of vehicles – it offered over 2500 different vehicles with varying fees, all of which were also available to the public. The Court could find nothing in ERISA that required any particular mix of plans – so Deere’s decision may not even be within its fiduciary responsibilities. Even if it is, the Court found no breach. 
     5) The Court also addressed the ERISA “safe harbor” provision as an alternative grounds for affirmance. The normal ERISA imposition of a fiduciary duty on a plan manager is modified when the participants: exercise independent control of their assets, can choose from a broad range of alternatives, and have sufficient information to make informed choices. Then, a fiduciary is not liable for a participant’s loss resulting from that exercise of control. Although this “safe harbor” provision is an affirmative defense normally not applied on a Rule 12(b)(6) motion, the Court noted that it can be applied when the complaint establishes the very elements of the defense. Here, the 2500+ options to plan participants with fees ranging from .07% to 1% establish the elements of the safe harbor for Deere and Trust and Research.
     6) The Court summarily rejected Hecker’s complaints with respect to the court’s refusal to entertain an amended complaint and its award of costs.