Federal courts on numerous occasions in the last two years have dismissed plan participant allegations that their employers charged excessive retirement plan fees.
The rulings taken together say: If a plan is not enriching itself at participants’ expense — or operating with a conflict of interest in relation to its investment company — then it’s under no obligation to scour the world for “wholesale” investment vehicles that have especially low fees, and it’s allowed to make participants pay those fees (like any other investor).
The latest such decision in favor of plan sponsors is Loomis v. Exelon Corp. In it, the 7th U.S. Circuit Court of Appeals affirmed a lower federal court’s decision that the plan did not violate its fiduciary duty administering the plan.
Loomis started when a group of employees in Exelon Corp.’s defined contribution pension plan charged plan administrators with breaching their fiduciary duty in two ways:
- Offering funds that included management expenses (of between 0.03 percent and 0.96 percent, depending on the fund) that reduced their return on investment. The expenses were no different from what the general public paid, but the plaintiffs complained that Exelon should have arranged for access to “wholesale” or “institutional” vehicles with lower fees.
- Requiring participants to pay those expenses, instead of such fees being covered by the plan.
The district court said that Loomis was essentially a “replay” of Hecker v. Deere & Co., (rehearing denied) and used its decision to dismiss the plaintiff charges. “Nothing in ERISA requires every fiduciary to scour the market to find and offer the cheapest possible fund,” the district court said, quoting Hecker.
The 7th Circuit affirmed, dismissing plaintiffs’ argument that Loomis differed substantially from Hecker, writing:
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 Loomis plaintiffs presented no evidence that Exelon’s relation with its investment companies constituted anything other than an arms-length transaction, the court said; in other words, there was no conflict of interest.
The court also pointed to the unreasonableness of the plaintiffs’ expectations, noting that:
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.
The appeals court also affirmed the district court’s award of $42,000 in costs to Exelon.
The 7th Circuit also cited the 3rd Circuit’s decision in Renfro v. Unisys Corp., a decision made less than a month before the 7th Circuit’s Loomis decision. The Renfro plaintiffs also alleged improper selection of investment options by a plan.
George v. Kraft Foods Global, Inc., cited by the Loomis court, also involved allegations of excessive fees. In George, the district court sided with the defendants, but the 7th Circuit overturned that court because there were still questions about whether the plan administrator did a complete cost-benefit analysis. For more on George, see this coverage by Trucker Huss.