Section 404(c) of ERISA relieves the fiduciary of an individual account plan of liability for losses stemming from the plan’s investments, when the plan allows the participants to exercise control over the investment of the assets in their plan accounts, and a number of requirements in the Department of Labor’s regulations are met. As such, Section 404(c) provides an affirmative defense to a claim for breach of fiduciary duty under ERISA. In Hecker v. Deere & Co., 556 F.3d 575 (7th Cir. 2009), the 7th Circuit Court of Appeals ruled that this affirmative defense protects plan fiduciaries from liability for the misconduct alleged in the case, namely the imprudent selection of mutual funds with excessively high fees. In so ruling, the Court said that it need not rule on whether the defense applies to the selection of investment options for a plan, since while Section 404(c) would not always shield a fiduciary from an imprudent selection of funds under “every circumstance that can be imagined”, Section 404(c) does protect a fiduciary that satisfies its requirements and includes a sufficient range of options so that the participants have control over the risk of loss.
As indicated by the court, the plans at issue in Hecker provided a generous selection of investment options for the plans’ participants, including 23 different Fidelity mutual funds, two investment funds managed by Fidelity Trust, a fund holding the employer’s stock, and a Fidelity-operated facility called BrokerageLink, which gave the participants access to some 2,500 additional funds managed by different companies. Despite the cautionary language in the opinion that Section 404(c) would not apply to “every circumstance that can be imagined”, Hecker raises the question as to whether simply offering plan participants a very large choice of investment options would automatically make the affirmative defense under Section 404(c) available to the plan’s fiduciary (when the plan otherwise meets Section 404(c)’s requirements) against the claim of an imprudent selection of investments for the plan. The 7th Circuit Court of Appeals has now indicated that Section 404(c) might not go that far.
The 7th Circuit Court of Appeals has turned down a request to rehear Hecker. However, in doing so, it issued an addendum (Hecker v. Deere & Company, No. 06 C 719, 6/24/09) which attempts to narrow the potential scope of the protection afforded to fiduciaries by Section 404(c) against the claim of an imprudent selection of investments. In the addendum, the panel handling the request for the rehearing stated that the Secretary of Labor has made a number of points in her amicus brief that deserve a response. The panel noted the Secretary’s apparent concern that Hecker may be read so that, if a fiduciary acts imprudently by selecting an overpriced portfolio of funds, Section 404(c), as applied in Hecker, will immunize the fiduciary from accountability for that decision. However, the panel stated that Hecker is not that broad, and is limited to the case presented before it.
The panel then noted that the Secretary also fears that Deere could be read as a sweeping statement that, under Section 404(c), a fiduciary can insulate itself from liability by the simple expedient of including a very large number of investment alternatives in its portfolio, and then shifting to the participants the responsibility for choosing among them. As to this, the panel stated that the Secretary is right to criticize such a strategy. It could result in the inclusion of many investment alternatives that a responsible fiduciary should exclude. It also would place an unreasonable burden on unsophisticated plan participants who do not have the resources to pre‐screen investment alternatives. Hecker, however, was not intended to approve this strategy, again being intended to deal with the facts before it.
Despite the efforts by the 7th Circuit Court of Appeals to narrow Hecker, it appears that if the fiduciaries of an individual account plan offer the participants a generous number of investment alternatives, which the fiduciaries select using prudent and reasonable procedures, and the plan otherwise complies with Section 404(c), those fiduciaries will have with a broad affirmative defense if the selection of investment alternatives should be challenged later.