The U.S. Court of Appeals for the Seventh Circuit has issued another important decision in favor of plans and plan administrators in a case involving allegations of excessive fees and expenses. In Loomis, et al. v. Exelon Corporation, et al., Nos. 09-4081 & 10-1755 (7th Cir. Sep. 6, 2011), Judge Easterbrook, writing for the three-judge panel, affirmed the district court’s dismissal of all claims. The case represents a defeat for plaintiffs alleging that retirement plans paid excessive fees to investment advisors and otherwise failed to uphold the fiduciary duties imposed under the Employee Retirement Income Security Act of 1974, as amended (“ERISA”).
Loomis involved a defined contribution pension plan for the benefit of the employees of Exelon Corporation (“Exelon”). As the Seventh Circuit noted, in recent years participants in defined contribution plans have contended that the sponsor offers too few investment funds (not enough choice), too many funds (producing confusion), or too expensive funds (meaning that the funds’ ratio of expenses to assets is needlessly high). Loomis fell in the third category.
The Loomis plan offered its participants 32 investment options, including 24 no-load mutual funds also available to the public at large. The Loomis plaintiffs contended that the plan administrators violated their fiduciary duties under ERISA by (1) offering mutual funds at “retail” rates for management fees instead of negotiating for a volume discount on mutual fund expenses, and (2) requiring plan participants to bear the costs of the mutual fund fees instead of those costs being covered by the plan. The plaintiffs argued that the plan should have offered participants access to “wholesale” or institutional investment vehicles, which some mutual funds offer. The Seventh Circuit disagreed with both theories of relief.
Following its prior decision in Hecker v. Deere & Co., 556 F.3d 575 (7th Cir. 2009), the court held, with respect to the first argument, 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).” Moreover, the court observed that “Exelon had (and has) every reason to use competition in the market for fund management to drive down the expenses charged to participants,” which increases the value of employee compensation and therefore Exelon’s competitiveness in the labor market.
The Seventh Circuit found that the plaintiffs’ second argument, that the plan should not have required participants to bear the costs of mutual fund expenses, was not addressed in Hecker. However, the court ruled that this theory of relief was also unavailing, because it misconstrued fiduciary duties under ERISA. The court found that, under prior U.S. Supreme Court case law, ERISA does not impose a duty on employers to contribute to employee benefit plans at a certain level and, in determining such contribution levels, employers “may act in their own interests.” Because the plaintiffs’ argument was, in essence, that Exelon should have contributed more to the participants’ accounts by covering mutual fund expenses, the court ruled that ERISA did not support this theory of relief.
Loomis is arguably inconsistent with the well-known district court decision in Tibble v. Edison International, No. CV 07-5359-SVW (C.D. Cal. Jul. 8, 2010)(appeal pending). In Tibble, the court held that the administrators’ selection of certain “retail” mutual fund investment options, without negotiating a volume discount on behalf of the beneficiaries or offering the option of less expensive “institutional” funds, was a violation of the administrator’s fiduciary duty of prudence under ERISA. Tibble, which is on appeal to the Ninth Circuit, may conflict with the analysis in Loomis on that issue. The distinction between the cases might also turn on their different reading of the facts. Tibble engaged in detailed pre-trial discovery of the fees and funds in question, before the court resolved the issues of fiduciary breach at trial. By contrast, Loomis dismissed the claims before trial, on legal precedent. However, taking note of an amicus brief submitted by Investment Company Institute, the Seventh Circuit observed that the average expense ratio of institutional share classes in equity funds in 2009 (the year Loomis was filed in the district court) exceeded the expense ratio of any of the “retail” funds actually offered by the Exelon plan. Whether the Ninth Circuit agrees or disagrees with the Seventh Circuit’s legal reasoning, or distinguishes the cases factually, could prove a significant development in the law of plan administrators’ fiduciary duties under ERISA.