Over the past five years, several Circuit Courts of the United States Courts of Appeals have issued rulings in cases dealing with claims against fiduciaries of employer-sponsored defined contribution retirement plans alleging breaches of fiduciary duties under the Employee Retirement Income Security Act of 1974 (“ERISA”) based on the payment of excessive mutual fund fees. Each of the cases dealt with participant- directed investment arrangements. If a retirement plan such as a 401(k) plan provides for a participant to exercise discretion to select investments for his or her account, and the plan complies with regulations issued by the Department of Labor under Section 404(c) of ERISA, and the participant in fact exercises control, the participant is not deemed to be a fiduciary and, most importantly, no person who is otherwise a fiduciary is liable for any loss by reason of any breach that is the direct and necessary result of the participant’s exercise of control.

The Circuit Court decisions discussed below address fee discrepancies in funds offered by different vendors and in different classes of shares of the same fund. It is well recognized that investment offerings provided by a 401(k) plan, including investments in mutual funds, with similar investment objectives from different vendors have expense charges which vary greatly. Further, many individual funds offer separate share classes which are identical investment vehicles, except that the shares are charged with different amounts of fund expenses. For example, a retail class of shares typically carries a higher expense charge than an institutional class from the same fund.

These cases, including the most recent decision by the 8th Circuit in Tussey v. ABB, 2014 WL 1044831 (8th Cir. 2014), are instructive for plan fiduciaries seeking to understand their fiduciary duties when making fund selection choices, at least as those duties relate to evaluating the fund fees.


Before addressing Tussey, this article provides a review of several cases which preceded the Eighth Circuit’s decision in Tussey. While each of the cases discussed in this article also dealt with other claims of breaches of ERISA fiduciary duties, the discussion in this article is limited to the claims relating to breaches of fiduciary duty for offering mutual funds with excessive expense charges.

In Hecker v. Deere & Company, 556 F.3d 575 (7th Cir. 2009), the plan participants argued that fiduciaries breached their fiduciary duties by selecting funds with unreasonably high fees. The plan offered participants 20 primary mutual funds  and access to more than 2,500 mutual funds through a brokerage window. The Seventh Circuit concluded that the range of funds offered included expense ratios, ranging from 0.07 percent to over 1 percent, and all of the funds were funds available to the overall public, and therefore, the fees charged would have been set “against the backdrop of market competition.” On these facts, the Court determined that there was no reasonable doubt that the plan offered a sufficient mix of investments, concluding that “nothing in ERISA requires every fiduciary to scour the market to find and offer the cheapest possible fund (which might, of course, be plagued by other problems).” With over 2,500 funds, the Court concluded that if a participant in fact paid excessive fees it must have been the result of the participant’s selection.

In Braden v. Wal-Mart Stores Inc., 588 F.3d 590 (8th Cir. 2009), however, the Eighth Circuit refused to uphold the District Court’s dismissal of claims against the plan fiduciaries on grounds similar to those the Seventh Circuit had in Hecker. In Braden, the retirement plan offered only the retail class of mutual funds shares, and only ten funds plus a stable value fund were offered. In sending the case back to the District Court for further consideration, the Circuit Court noted plaintiffs’ claim that plans of similar size have the ability to obtain mutual fund class shares which charge lower fees.

More recently, in Renfro v. Unisys Corporation, 671 F.3d. 314 (3rd Cir. 2011), the Third Circuit was faced with a plan with 73 investment options. The plaintiffs’ claimed that the selection and inclusion of retail class mutual funds in the investment options was a breach of fiduciary duty. Based on the facts presented and the large number of available funds with a variety of risk profiles, investment strategies and fees, the Third Circuit concluded that participants had not plausibly alleged a breach of ERISA fiduciary duty.

Using similar logic, the Seventh Circuit in Loomis v. Exelon Corporation, 658 F.3d 667 (7th Cir. 2011), followed its earlier decision in Hecker. In Loomis, the plaintiff claim involved a plan offering 32 funds, of which 24 were retail class funds. The Seventh Circuit concluded that the range of funds and fees charged included high-expense funds, low-expense index funds and low-expense, low-risk, modest-return bond funds, which offered participants the opportunity to make a choice of the type of fund and fees to be paid, and that the fiduciaries would not be faulted for doing so.

While a casual reading of the cases discussed above might lead one to believe that the number of funds is the key determining factor, Hecker, Renfro and Loomis each acknowledge and repeat the fact that the available funds had a wide range of fees from which participants could select.

Focus on Embedded Administrative Fees

While these earlier cases focused on the absolute total of fees paid on the funds, the plaintiffs’ allegations, to the extent made at all, were not as well developed as in two more recent cases on the issue of whether using retail class funds is a breach of fiduciary duty because it results in payment of higher fees than necessary to compensate the bundled service provider. That is, these later cases focus more clearly on the amount of mutual funds fees that are rebated back to the administrative service provider in the form of 12b-1 fees, subaccounting fees or fee sharing within the same family of companies to cover costs of plan administration provided to a plan.

In Tibble v. Edison International, 729 F.3d 1110 (9th Cir. 2013), the Ninth Circuit was faced with a plan with 10 institutional and commingled funds, 40 mutual funds and one employer stock fund. The Circuit Court concluded that the selection of the high fee funds by the plan fiduciaries would not be protected under ERISA Section 404(c) because the cost incurred by participants were not the necessary result of participant direction. While concluding that the inclusion of retail class funds would not itself be a breach of fiduciary duty, the Court did ultimately uphold the District Court’s conclusion that the fiduciaries had been imprudent in introducing the retail class shares of three mutual funds because the fiduciaries failed to investigate the possibility of selecting the institutional class shares of the same funds with lower expense charges. In this case, the plan’s investment consultant Hewitt Financial Services did not advise the fiduciaries to investigate the possible availability of the institutional class shares and such reliance on the consultant’s faulty advice was insufficient to protect the fiduciaries. As the Ninth Circuit noted, “Hewitt is its consultant, not the fiduciary.” Thus, a lesson from Tibble is that a plan fiduciary is not protected solely by offering a wide range of funds and fees; when the opportunity exists, the fiduciary must also evaluate whether it can obtain a better economic deal for the plan’s participants.

Now, in Tussey v. ABB, Inc., 746 F.3d 327 (8th Cir. 2014), the Eighth Circuit has again addressed the fund fee question. While the ABB plan offered a range of funds with various fees, in Tussey the Circuit Court’s focus was clearly on whether those funds and fees paid were excessive because the fiduciaries were overcompensating Fidelity Management Trust Company (“Fidelity”) for the administrative services it provided to the plan. As stated in the Eighth Circuit’s opinion, the District  Court had found, as a matter of fact, that the “ABB fiduciaries failed to (1) calculate the amount the Plan was paying Fidelity for recordkeeping through revenue sharing, (2) determine whether Fidelity’s pricing was competitive, (3) adequately leverage the Plan’s size to reduce fees, and (4) ‘make a good faith effort to prevent the subsidization of administrative costs of ABB corporate services’ with Plan assets” even though their outside consultant notified them that the Plan was overpaying for recordkeeping services. Thus, the facts in Tussey evidenced that the fiduciaries had ignored advice that the fees being received by Fidelity exceeded reasonable fees for the services received by the plan and were subsidizing other services being provided to ABB. As a result, the Circuit Court concluded that reliance on Hecker and its progeny was misplaced and upheld the District Court’s finding that the plan fiduciaries had breached their duties under ERISA to the plan.


While each of the cases tends to be very fact specific, the cases provide the following guidance to plan fiduciaries:

  • Inclusion of the retail class of mutual funds with high fees is not by itself a breach of fiduciary duty.
  • A large number of funds with a range of expense ratios is beneficial in defending claims that cheaper funds should have been made available.
  • Blind reliance on the advice of a consultant is not a defense to a breach of fiduciary duty. Fiduciaries should consider the advice received and question anything which appears omitted or is unclear. In contrast, failure to act on good advice from a consultant, as was the case in Tussey, is even more likely to result in a breach of fiduciary duty,
  • When a plan sponsor has other business relationships with a service provider to a retirement plan, the plan’s fiduciaries should take extra steps to be certain that the retirement plan business is not subsidizing the cost of any other business with the vendor.
  • The revenue obtained by a plan services vendor, whether in the form of direct payments, and rebated fees or allocation of internal expense charges, should be no more than reasonable fees for the administrative services rendered. New disclosure rules required by the Department of Labor make the evaluation of the fees being paid much easier than in the past. The difficult issue still remains of determining what amount is reasonable for the services received. Consultants who have experience with many plans can be very helpful in providing this type of information.
  • The larger the plan in terms of asset size, the higher the level of scrutiny applied to the fiduciaries’ actions. A fiduciary’s duty under Section 404 of ERISA is to “act with the care, skill, prudence, and diligence under the circumstances then prevailing that a prudent man acting in a like capacity and familiar with such matters would use in the conduct of an enterprise of a like character and with like aims.” The plans involved in these cases were all very large plans. It is not surprising that under the ERISA fiduciary standard, a fiduciary with a large amount of assets, large fees payments and, potentially, greater negotiating leverage, would be expected to act differently and with more attention and expertise than a small plan. ¢