Plaintiffs allege that Defendants caused the Plan to pay unreasonable administrative fees to its recordkeeper State Street/CitiStreet. Additionally, Plaintiffs allege that Defendants selected and retained mutual funds as Plan investment options until 2006, which charged excessive investment management expenses and were the vehicle Defendants used to funnel excessive Plan recordkeeping and administrative fees to State Street/CitiStreet via revenue sharing.
Plaintiffs further allege that the Small Cap Fund provided additional revenue sharing fees to State Street/CitiStreet and charged its investors one hundred and seven basis points per year in fees, which was grossly excessive, in order to benefit Defendants’ corporate relationship with State Street/CitiStreet.
Plaintiffs further allege that Defendants failed to monitor and remove an imprudently risky concentrated sector fund, i.e. the Technology Fund, and instead retained this fund for the purpose of benefiting its corporate relationship, rather than for the sole benefit of the Plan Participants.
Lastly, Plaintiffs allege that the Boeing Company Stock Fund incurred excessive fees and held excessive cash, impairing the value of the Plan assets. With regard to this fund, Plaintiffs also allege that Defendants failed to remedy the resulting transaction and institutional drag.
Defendants raised a number of arguments in seeking to have plaintiffs’ claim thrown out. First, they argued that the interpretation of ERISA’s statute of limitations in Tibble v. Edison should apply here and that because all of the funds were selected prior to six years before the lawsuit was filed, there can be no fiduciary breach. The court rejected the Tibble interpretation, as well as plaintiffs’ arguments that the fraud and concealment exception should apply. Citing the briefs in support of plaintiffs in the Tibble appeal to the Supreme Court, the court found that in the 7th Circuit, there is a clear duty to monitor investments after they have been selected, regardless of whether they were selected prior to 6 years before the lawsuit. The court made clear then that the claims in the case begin on September 28, 2000.
Next, the court addressed merits arguments for each of the four claims, however, they are too extensive for us to go into enough detail without simply repeating 20 pages worth of opinion. We highly suggest you read the opinion starting at page 24. Instead, we will pull out the broad highlights.
First, the court found compelling plaintiffs’ argument that the defendants failed to solicit competitive bids for the plan’s administrative services. The court noted that when they finally did, the fees paid ($32 per head) were directly in line with the expert testimony put forth by the plaintiffs.
Second, the court did an extensive job of limiting the Hecker opinion, which the defendants sought to use expansively. The court stated:
Hecker makes clear that revenue sharing does not inherently violate ERISA. In the instant case, however, Plaintiffs assert that Defendant fiduciaries put the mutual funds into the Plan, which generated revenue sharing for State Street/CitiStreet, so that these funds could provide this revenue sharing to State Street/CitiStreet. Plaintiffs cite to the testimony of various Boeing employees to argue that Defendants either “deliberately steered revenue to State Street or were conveniently oblivious to these excessive fees.”…Further, Plaintiffs here argue that the total fees (or expense ratios) for these mutual funds were excessive. Additionally, in Hecker, there was no argument that the administrative fees were not reasonable. See also George v. Kraft Foods Global, Inc., 674 F. Supp. 2d 1031, 1048, n. 17 (N.D. Ill. 2009) (“at a fundamental level, Hecker says nothing regarding the duty a fiduciary holds with respect to a 401(k) investment plan’s administrative services fees.”). Lastly, Boeing’s Plan has fewer available investment options than the plan in Hecker. See Braden v. Wal-Mart Stores, Inc., 588 F.3d 585, 596 n. 6 (8th Cir. 2009) (“The far narrower range of investment options available in this case makes more plausible the claim that this Plan was imprudently managed.”). Plaintiffs assert that, in contrast to the twenty-three retail mutual funds and the brokerage window (by which the participants could invest in approximately 2,500 mutual funds) offered in Hecker, Defendants offered only eleven investment options, and the four mutual funds were deliberately included to benefit Boeing’s corporate relationship with State Street/CitiStreet.
Third, the plaintiffs’ arguments of a conflict of interest regarding Boeing’s relationship with State Street/CitiStreet was clearly convincing to the court at this stage.
Fourth, in many instances the defendants failed to cite to any evidence of procedural prudence in support of its selection and monitoring of certain investments. This was extensively highlighted by the plaintiffs.
As noted above, this decision reflects the pendulum that has clearly swung in the participants’ favor in recent years. See also Victory for Plaintiffs: 7th Circuit Allows Class Certifications for Excessive Fee Cases; Tussey v. ABB Affirmed, Reversed, and Vacated in Part by 8th Circuit; and Supreme Court Rejects the Moench Presumption – Vacates and Remands Fifth Third Case)
Having been in the trenches in 2009 after the Hecker decision, betting a dollar that a decision such as this would be likely someday would have been a waste of a perfectly good dollar.
This decision makes two things clear. First, the ERISA plaintiff’s bar has refined the claims being brought and/or argued since Hecker and has doubled down on conflicts of interest. This shouldn’t come as a surprise. Cases such as Braden v. Walmart have provided a clear path of success, as did many of the earlier and recent settlements involving self-dealing (Bechtel, Caterpillar, Cigna, etc…) Second, Hecker doesn’t have teeth anymore…maybe just baby molars. Possibly it’s greatest lasting truth is that service providers such as Fidelity are not fiduciaries when they design a products such as a line up of funds.
As noted, trial is set for May 20, 2015. We will continue to monitor the case and report any future developments.