Appellate Court Blesses Excessive Fee Suit Dismissal

A federal appellate court’s to-the-point ruling in an excessive fee case involving United Technologies Corp. (UTC) may not have been couched in elaborate language, but it nevertheless extended UTC’s legal winning streak.

While taking pains to remind readers of the three-page decision that it was not to be used as legal precedent, the 2nd U.S. Circuit Court of Appeals ruled that a lower court judge correctly threw out the fiduciary breach case involving UTC’s 401(k) plan. The appellate panel asserted simply: “We have considered each of plaintiff’s arguments on appeal and, substantially for the reasons stated in the District Court’s thorough and well-reasoned memorandum of decision dated March 3, 2009 … we find them to be without merit.”

Senior U.S. District Court Judge Warren W. Eginton of the U.S. District Court for the District of Connecticut had rebuffed arguments by three 401(k) participants that, among other things, UTC should have thought twice about picking actively managed funds because of the “near certainty” an active fund will not best its index counterpart (see “UTC Gets Legal Victory in Excess Fee Case”).

Eginton went on to reject the argument UTC had not adequately considered using lower-cost separate account vehicles instead of mutual funds and that its revenue-sharing arrangements led to unreasonably high and improperly disclosed fees.

In their appeal of Eginton’s ruling, the participants argued that Eginton erred when he threw out the case, insisting their evidence showed that:

  • UTC chose retail mutual funds as investment options for employees without considering how a large plan might get a better investment deal;
  • UTC’s mutual funds deducted from participant investments unreasonably high sub-transfer fees;
  • UTC did not disclose full information about the sub-transfer fees; and
  • UTC operated the employee stock fund imprudently, which caused it to be a significant underperformer.

In a statement released after the decision, Washington law firm Covington & Burling LLP contended Eginton’s ruling had established important precedents in the development of the law regarding the wave of recent excessive 401(k) fee suits. The firm represented UTC. 

The case is Taylor v. United Technologies Corp., 2d Cir., No. 09-1343-cv.

Eginton’s ruling is available here. The 2nd Circuit’s decision is available here.