No Dough from Deere
The Seventh Circuit case of Hecker v. Deere, Nos. 07-3605, 08-1224 (7th Cir. Feb. 12, 2009) (regarding fiduciary liability in connection with a participant-directed "401(k)" plan), seems to be reverberating wildly. See, e.g., Special Report, "ERISA Plan Fees Cases Face Uphill Battle after Seventh Circuit Ruling," 36 BNA Pens. & Bens. Rep. 589 (Mar. 10, 2009). I think that it's human nature to want someone (in particular, someone other than oneself) to be at fault for bad things that happen, and the propensity of participants to sue in connection participant-directed plan investments is, to me, indicative of this frailty. A menu of funds is made available and you choose an investment strategy with some amount of aggressiveness, and the value of the account then falls - well, SOMEone has to pay, right?
Now all of this is not to say that there can't be valid claims in connection with participant-directed plans. I strongly believe that neither Section 404(c) nor the fact of ultimate participant direction (whether or not under a Section 404(c) plan) should serve as a free pass from ERISA obligations prudently to select and monitor, and negotiate regarding, the funds that will be included in a plan's menu. So I think that the district court in Hecker v. Deere went a bit too far in setting Section 404(c) as a total shield, and I'm glad that the Seventh Circuit refined the analysis.
For myself, I think the Circuit Court was essentially right, but with some troubling shades. I do not prefer the broad cover the court gave for sponsors going with a broad range of funds. I have long believed that a sponsor should be free to offer a more narrowly tailored selection of funds so as to limit the confusion that participants might experience in fund selection. When you go to a restaurant and there's only three choices, you may well be frustrated; but, as much as I like the seemingly endless menu or a Friday's or Cheesecake Factory, I sometimes can't make up my mind regarding what I finally want. Sometimes, I suppose, less is more, and I fear that Hecker v. Deere will push sponsors to throwing the kitchen sink at participants. Every decision isn't a purely legal one, and it would be nice if the critical HR and other design aspects of a plan were not relegated to back seat.
There are other interesting aspects of the case. I like that the Circuit Court dispensed with the notion that a provider, acting for itself to present investment opportunities, is not somehow a fiduciary in connection with the choices it offers. At some point, if you go the other way on issues like this, you're going to drive potential service providers out of the market, or at least drive up costs.
I also like the implication that what other fiduciaries are doing is relevant to the prudence inquiry. While Section 404(a)'s prudence standard is viewed as requiring expert conduct, it's still at base a negligence standard (for those who want to go back to their days of law school and Learned Hand, compare Titus with Mayhew with the TJ Hooper (not the Shatner series, which was TJ Hooker), and all that rot). Can it be that if everyone's doing something a certain way, they're all negligent? It's a fascinating question, to which I would've thought the best answer is, "no." But cf. Keach v. United States Trust Co., 313 F. Supp. 2d 818 (C.D. Ill.) ("The testimony at trial indicated that it was the custom in the industry for there to be no formal written report documenting the results of corporate legal due diligence. The Court finds this custom in the industry unacceptable."), claim dismissed, 313 F. Supp. 2d 874 (C.D. Ill.), related proceeding, 338 F. Supp. 2d 931 (C.D. Ill. 2004), aff'd on other grounds [yay, Norman G.!], 419 F.3d 626 (7th Cir. 2005) (that's some saga, and there's more that came before!). However, an emerging issue could become whether, even if custom in the market is relevant to the prudence/negligence inquiry, is the baseline (i) what other ERISA fiduciaries are doing, (ii) what other plan fiduciaries are doing, whether or not the plans are subject to ERISA (cf. 29 C.F.R. § 2510.3-101(f)(2)(i), sans ERISA § 3(42)) or (iii) what other investors generally are doing? I think that Hecker v. Deere presents some challenging facts that put pressure on this aspect of analysis, and that a precise identification of the underlying analytical premises is an important aspect of the inquiry.
I think that you can see some frustration on the part of the court with the plaintiffs and their claims. The stakes here are high - if on the basis of some technical argument you conclude that a claim should withstand a motion to dismiss and should beat a motion for summary judgment, you are on a road leading to enormous litigation expenses, potential bet-the-farm liabilities and, eventually, material settlements. And it would all on account of a claim that, at the end of the day, as a general matter probably should not succeed. The only way to avoid all of that is to dismiss the claims.
Ultimately, I guess, I think that strike suits that will eventually be lost, but which can withstand motions to dismiss and withstand summary judgment, and thereby give rise to enormous legal fees and risks, are not productive or right. At the end of the day, a reasonable Section 404(c) structure should indeed insulate a sponsor from liability where participants are looking for someone to blame for the investment approach they took. Thus, nuances aside, even though the nuances may well be substantial (if that's not too much of a contradiction in terms), I like where Hecker v. Deere comes out.
(Frankly, I'd rather see the investment-advice exemptions be interpreted as the DOL has interpreted them thus far (not much chance of that now, I fear), so that participants have a better shot at what they should be doing investment-wise, but that's just I (or, for readability, "just me").)
Regardless of whether any given affected party is pro or con on the issues, this case seems to have struck a chord with just about everyone who's every uttered "ERISA" - sorta like the Golden Gate case involving pay-or-play (see my prior post on Golden Gate). The amicus briefs just keep on comin', and I was particularly fascinated by an amicus brief filed by a Gang o' Five, some of whom might be veritable Gods of ERISA. (Maybe I'm too caught up in the whole 300/Spartans thing?)
I was also reading in a story broken by The Dallas Morning News about the Dallas educators who allegedly took kids and locked them is a cage so they could have a WWE or Ultimate Fighting cage-match experience to settle their differences. (It's just so . . . Texas.) It got me thinking about the old MTV Celebrity Deathmatches (which were guilty pleasures that were probably far more enjoyable than they had any right to be). My mind then turned to thinking about what fun (fund?) it would be to have the Gang o' Five do bloody battle against Fidelity, Merrill (whatever's left of it), Vanguard, etc.
And, now that so many ERISA-type issues have gotten just so darn emotional, I was in turn thinking of whether there could be some broader role for the Deathmatch concept here - maybe an ERISA Battle of the Titans with other featured matches. To wit:
- Andrew Cuomo, Barney Frank and Suicide Grassley (is he KIDDING?!?), in a tag-team match against AIG executives both big and small, with special guest referee Barack Obama (it was pretty cool the way he showed such balance on this with Jay Leno, no?).
- George Miller v. anyone in the financial-services industry or anyone involved with the now-suspended investment-advice regulations.
- Wal-Mart v. representatives of the anti-preemption crowd (I pity anyone going up against Wal-Mart), as to the Maryland litigation, the above-mentioned Golden Gate litigation, etc., etc., etc.
- Rahm Emanuel, John Kerry and Charles Rangel . . . wrangling . . . with hedge-fund representatives over any number of compensation-related tax issues.
Feel free to come up with your own. Try it; it's almost fun . . .