Following its earlier holding in Hecker v. Deere & Co., 556 F.3d 575 (7th Cir. 2009), the United States Court of Appeals for the Seventh Circuit has again rejected ERISA breach of fiduciary duty claims brought against a plan sponsor by plan participants challenging the sponsor's offering of "retail" mutual funds as investment options in its defined-contribution retirement plan. In Loomis v. Exelon Corp. (7th Cir. Sept. 6, 2011), the Seventh Circuit thus reaffirmed its view that ERISA does not effectively require fiduciaries of large corporate retirement plans to offer ostensibly lower-cost "wholesale" or "institutional" funds, rather than retail mutual funds, as the Loomis plaintiffs argued.
In the lower court, the Loomis plaintiffs contended that the Exelon plan fiduciaries violated their ERISA duties in two ways: (1) "by offering 'retail' mutual funds, in which participants get the same terms (and thus bear the same expenses) as the general public"; and (2) in a new twist among this strain of ERISA excessive fee cases, "by requiring participants to bear the economic incidence of those expenses themselves, rather than having the Plan cover these costs." The district court dismissed these claims on the pleadings, and the plaintiffs appealed.
In a unanimous panel decision led by Chief Judge Easterbrook, the Seventh Circuit affirmed the district court's ruling. At the outset, the court reaffirmed the principal holding in Hecker: namely, that by offering an "acceptable array" of about two dozen fund options with a wide range of expense ratios, the plan sponsor complied with its fiduciary duties "as a matter of law," even if it did not "scour the market to find and offer the cheapest possible fund." The court also noted that the plaintiffs' "paternalistic" theory did not even take into account the drawbacks of institutional investment vehicles such as lower liquidity. In addition, the court rejected the plaintiffs' argument that the Supreme Court's decision in Jones v. Harris Associates, L.P., 130 S. Ct. 1418 (2010), should alter the analysis. The Seventh Circuit stated in relevant part:
Nothing in Jones. . . undermines Hecker's analysis. . . [Jones] dealt with the fiduciary duties of investment advisers, which as the Court observed have a conflict of interest when seeking management fees from mutual funds under their effective control. Plaintiffs do not contend that the funds that Exelon selected had any control over it, or it over them; there is no reason to think that Exelon chose these funds to enrich itself at participants' expense. To the contrary, Exelon had (and has) every reason to use competition in the market for fund management to drive down the expenses charged to participants, because the larger participants' net gains, the better Exelon's pension plan is.
The Seventh Circuit also rejected the plaintiffs' alternative suggestion that the plan sponsor could have negotiated for a "flat-fee" structure, rather than a structure where investment-related fees are paid as a percentage of assets under management. In this respect, the court observed that, even if it were possible to implement, a "flat-fee structure might be beneficial for participants with the largest balances, but, for younger employees and others with small investment balances, a capitation fee could work out to more, per dollar under management, than a fee between 0.03% and 0.96% of the account balance."
With respect to the Loomis plaintiffs' second fiduciary breach claim, the court held that Exelon's threshold decision whether to cover the fund expenses (or pass them along to participants) "is a question of plan design, not of administration. The participants want Exelon to contribute more to the Plan than it does. ERISA does not create any fiduciary duty requiring employers to make pension plans more valuable to participants. When deciding how much to contribute to a plan, employers may act in their own interests." Thus, the Seventh Circuit concluded that this claim was a "non-starter."