Beginning in late 2006, a number of complaints were filed against 401(k) plan sponsors and plan service providers, charging fiduciary breaches in connection with the allegedly high level of fees being paid on plan investments that were then shared with plan service providers, a practice referred to as "revenue sharing." With one exception, Hecker v. Deere & Co., courts faced with revenue-sharing motions to dismiss have uniformly permitted the plaintiffs' claims to go forward. On Feb. 12, 2009, the Seventh Circuit Court of Appeals issued its much-anticipated decision in Hecker, affirming the district court's dismissal of the case in its entirety.

In Hecker, a class of participant plaintiffs sued the plan sponsor (Deere & Co), the trustee of the 401(k) plan (Fidelity Management Trust Co.), and the plan's investment provider (Fidelity Research), alleging that (1) the fees associated with the plan's investment options were excessive; (2) the revenue-sharing agreement between Fidelity Trust and Fidelity Research violated ERISA; and (3) the plan sponsor violated its fiduciary duty by limiting the plan's investment options to Fidelity mutual funds. No claims survived the motion to dismiss.

Among the findings in the Seventh Circuit's ruling are the following:

  • There is no duty to offer the cheapest fund. A plan sponsor is not required to "scour the market to find and offer the cheapest possible fund." Offering only the cheapest funds has problems of its own.
  • There is no duty to disclose revenue-sharing agreements. A plan sponsor must disclose fees charged to participants, not how the fees are broken down among vendors once they are paid.
  • Fees paid from mutual fund investments are not plan assets. The Fidelity defendants did not handle plan assets when they divided the fees, nor did they exercise discretion over investment options available under the plan.

The Hecker case will likely be instructive for other courts deciding similar excessive fee or revenue-sharing cases.

This article is presented for informational purposes only and is not intended to constitute legal advice.