Opinion ID: 1466164
Heading Depth: 1
Heading Rank: 7

Heading: Safe Harbor Defense

Text: Even if we have underestimated the fiduciary duties that Deere had to its plan participants, the district court's judgment in favor of the defendants must stand if that court correctly decided that the safe harbor provided in 29 U.S.C. § 1104(c) is available to them. This was the ground on which the district court primarily relied. If the defense is available, it provides an alternate ground for affirmance. Although ERISA normally imposes a fiduciary duty on plan managers, the statute modifies that rule for plans that provide for individual accounts and allow a participant or beneficiary to exercise control over the assets in his account. 29 U.S.C. § 1104(c)(1). First, the participant must have the right to exercise independent control over the assets in her account and in fact exercise such control. Next, the participant must be able to choose from a broad range of investment alternatives, 29 C.F.R. § 2550.404c-1(b)(1)(ii). As we noted in Jenkins v. Yager, 444 F.3d 916 (7th Cir.2006), prominent among [the conditions a plan must meet] is that it must provide at least three investment options and it must permit the participants to give instructions to the plan with respect to those options at least once every three months. 29 C.F.R. § 2550.404c-1(b)(2)(c). 444 F.3d at 923. Third, the participant must be given or have the opportunity to obtain sufficient information to make informed decisions with regard to investment alternatives available under the plan. 29 C.F.R. § 2550.404c-1(b)(2)(i)(B). The regulation sets forth nine criteria that must be met before the participant may be considered to have sufficient investment information. Id. Those criteria call for such things as clear labeling of the plan as § 1104(c) instrument, a description of the investment alternatives available, identification of designated investment managers, explanation of how to give investment instructions, a description of any transaction fees and expenses which affect the participant's ... balance in connection with purchases or sales of interests, id. § 2550.404c-1(b)(2)(i)(B)(1)(v), relevant names and addresses of plan fiduciaries, special rules for employer securities, special rules for investment alternatives subject to the Securities Act of 1933, and materials related to voting, tender, or other rights incidental to the holdings in the account. Other parts of the regulation emphasize that the fiduciary must furnish extensive information on the operating expenses of the investment alternatives, copies of relevant financial information, and other similar materials. Id. § 2550.404c-1(b)(2)(i)(B)(2). The regulation does not require plans to offer only cost-free investment vehicles. It recognizes that a plan does not fail to provide an opportunity for a participant or beneficiary to exercise control over his individual account merely because it ... imposes charges for reasonable expenses. Id. § 2550.404c-1(b)(2)(ii)(A). Procedures must be in place, however, to inform participants of the actual expenses incurred with respect to their individual accounts. Id. Other parts of the regulation address the required frequency of investment instructions. Finally (for our purposes), the regulation provides that independent control will not be found if a plan fiduciary has concealed material non-public facts regarding the investment from the participant or beneficiary. Id. § 2550.404c1(c)(2)(ii). The regulation sums up the effect of a finding of independent exercise of control, from the perspective of a plan fiduciary, as follows: If a participant or beneficiary of an ERISA section 404(c) plan exercises independent control over assets in his individual account in the manner described in paragraph (c), then no other person who is a fiduciary with respect to such plan shall be liable for any loss, or with respect to any breach of part 4 of title I of the Act, that is the direct and necessary result of that participant's or beneficiary's exercise of control. Id. § 2550.404c-1(d)(2)(i). The safe harbor provided by § 1104(c) is an affirmative defense to a claim for breach of fiduciary duty under ERISA. In re Unisys Sav. Plan Litig., 74 F.3d 420, 446 (3d Cir.1996). Although normally a district court should not base a dismissal under Rule 12(b)(6) on its assessment of an affirmative defense, see U.S. Gypsum Co. v. Indiana Gas Co., 350 F.3d 623, 626 (7th Cir.2003), that rule does not apply when a party has included in its complaint facts that establish an impenetrable defense to its claims. Tamayo v. Blagojevich, 526 F.3d 1074, 1086 (7th Cir.2008). In Tamayo, we went on to explain that [a] plaintiff pleads himself out of court when it would be necessary to contradict the complaint in order to prevail on the merits.... If the plaintiff voluntarily provides unnecessary facts in her complaint, the defendant may use those facts to demonstrate that she is not entitled to relief. Id. (internal citations and quotation marks omitted). Plaintiffs here chose to anticipate the § 1104(c) defense in their Complaint explicitly and thus put it in play. Paragraph 58 begins by noting that ERISA § 404(c) provides to Plan fiduciaries a `Safe Harbor' from liability for losses that a participant suffers in his or her 401(k) accounts to the extent that the participant exercises control over the assets in his or her 401(k) accounts. Paragraphs 58 through 61 describe the information that Deere, as a plan fiduciary, was required to furnish. Later, the Complaint has a section entitled Defendants' Non-Compliance with § 404(c)'s Safe Harbor Requirements and Concealment of Its Fiduciary Breaches. Paragraphs 91 through 101 specify exactly what Deere and Fidelity allegedly failed to do. For example, paragraphs 91 and 100(c) and (e) accuse them of failing to disclose that Fidelity was engaged in revenue sharing among its different entities. Paragraphs 93 and 100(b) assert that Plan participants did not have complete knowledge of the fees and expenses that were being charged to the Plans and that were reducing their account balances. Paragraphs 95 and 101(i) charge, among other things, that Deere and Fidelity failed to disclose their agreement that Deere would offer only Fidelity-related funds for the Plans. The district court concluded that the Complaint so thoroughly anticipated the safe-harbor defense that it could reach that issue; we agree with it, bearing in mind that we must still consider any factual allegations in the light most favorable to plaintiffs. The Hecker group argues that even if the Complaint anticipated the safe-harbor defense, further proceedings are needed because the Complaint did not address all of the 25 or so different requirements that must be met in order to establish it definitively. Deere implies that this overstates the number of requirements, but its primary point is that plaintiffs have waived the right to complain about the Plans' compliance with all but two criteriathe obligation to disclose fund-level fees and the level of expenses (see 29 C.F.R. §§ 2550.404c-1(b)(2)(i)(B)(1)(v) and (B)(2)(i)). In some instances, it is inappropriate to jump to the conclusion that a point has been waived when a case is being decided on the pleadings, but this is not such a case. Plaintiffs chose to discuss § 1104(c) extensively in the Complaint and to specify the ways in which the Plans fell short for purposes of the defense. To shift grounds now would undermine the notice that defendants gleaned from the Complaint, to their prejudice. Restricting our analysis to the challenges in the Complaint, we see no plausible allegation that the Plans do not comply with § 1104(c). Plaintiffs have focused on matters that are not helpful to them in the end, namely, the defendants' failure to disclose non-public material information, their revenue-sharing arrangements, and their decision to offer only Fidelity Research mutual funds. As we have already noted, however, the regulations implementing the safe-harbor defense describe in detail the expenses and fees that must be disclosed. The fee distribution by the management company post-collection is not one of those fees. See 29 C.F.R. §§ 2550.404c1(b)(2)(i)(B)(1)(v), (2)(i). And, as we have already explained, the revenue-sharing arrangement between the Fidelity defendants is not material information for a participant's investment decision. The central question is thus whether the alleged misconductthe imprudent selection of mutual funds with excessively high fees  falls within the safe harbor. Plaintiffs begin with a broadside attack, asserting that the defense has no application to a fiduciary's assembling an imprudent menu [of investment options] in the first instance. DiFelice v. U.S. Airways, Inc., 497 F.3d 410, 418 n. 3 (4th Cir.2007). Deere and Fidelity respond that there are no exceptions to § 1104(c)'s safe harbor, which in terms applies to any breach committed by someone who is otherwise a fiduciary. Pinning their hopes on a footnote to the preamble to the implementing regulations, see 57 Fed.Reg. 46906-01, 46, 924 n. 27 (Oct. 13, 1992), plaintiffs argue that the Secretary has carved out the activity of designating investment options from the safe harbor. Fidelity and Deere respond that this type of informal commentary, which was never embodied in the final regulations, cannot override the language of the statute and regulations. Plaintiffs would like us to decide whether the safe harbor applies to the selection of investment options for a plan, but in the end we conclude that this abstract question need not be resolved to decide this case. Even if § 1104(c) does not always shield a fiduciary from an imprudent selection of funds under every circumstance that can be imagined, it does protect a fiduciary that satisfies the criteria of § 1104(c) and includes a sufficient range of options so that the participants have control over the risk of loss. Cf. Langbecker v. Electronic Data Sys. Corp., 476 F.3d 299, 310-11 (5th Cir.2007); and Unisys, 74 F.3d at 445 (holding that a fiduciary that committed a breach of duty in making an investment decision for a Plan may nevertheless take advantage of the § 1104(c) defense); but see DiFelice, 497 F.3d at 418 n. 3. The regulation addresses the investment options by stipulating that the § 1104(c) defense is available only if the plan offers a broad range of investment alternatives. 29 C.F.R. § 2550.404c-1(b)(3). The necessary broad range exists only if the available investment alternatives are sufficient to provide the participant or beneficiary with a reasonable opportunity to accomplish three goals: the ability materially to affect potential return and degree of risk in the investor's portfolio; a choice from at least three investment alternatives each of which is diversified and has materially different risk and return characteristics; and the ability to diversify sufficiently so as to minimize the risk of large losses. Id. §§ 2550.404c1(b)(3)(i)(A)-(C). Interestingly, in light of the inclusion of the BrokerageLink facility in the plans available to the Deere participants, the regulation also notes that [w]here look-through investment vehicles are available as investment alternatives to participants and beneficiaries, the underlying investments of the look-through investment vehicles shall be considered in determining whether the plan satisfies the requirements of [the regulation]. Id. § 2550.404c-1(b)(3)(ii). The 2,500 mutual funds available through BrokerageLink had fees ranging from .07% to 1%. Any allegation that these options did not provide the participants with a reasonable opportunity to accomplish the three goals outlined in the regulation, or control the risk of loss from fees, is implausible, to use the terminology of Twombly. Plaintiffs complain that non-Fidelity funds were available only through BrokerageLink, but that is immaterial under this regulation. If particular participants lost money or did not earn as much as they would have liked, that disappointing outcome was attributable to their individual choices. Given the numerous investment options, varied in type and fee, neither Deere nor Fidelity (assuming for the sake of argument that it somehow had fiduciary duties in this respect) can be held responsible for those choices.