Defensive Plan Building After Loomis

Many of you may remember the race among law firms, after the trial court ruling in Tibble, to issue client alerts advising plan sponsors to make sure they were not holding retail share classes in their 401(k) plan investment options. Now, of course, we have the Seventh Circuit holding that it is just plain fine to have retail shares in the investment mix. So which is it? Well, of course, as I alluded to in my last post, it is really both.

In my article on Tibble, Hecker and excessive fee claims in the Journal of Pension Benefits, I took exception to the idea that Tibble effectively barred holding retail share offerings and explained that, under the detailed fact based approach applied by the court in Tibble, holding retail share classes instead of institutional share classes would not be actionable, even if the former were more expensive than the latter, if there are legitimate “issues with performance, availability of information, investment minimums, or other concerns about an institutional share class in a particular plan that would justify a deviation from including them as investment options” in favor instead of more expensive investment options, such as retail share classes. The Seventh Circuit took this exact same approach in Loomis, allowing the holding of the retail share classes in part because other possible investment selections that the plaintiffs asserted would have been preferable were not realistic, feasible, cost effective or practical alternatives to the retail shares. Thus, as was not the case in Tibble, in Loomis there was a finding that there was a legitimate basis for holding the retail share classes instead of other, proffered alternatives.

Now one can quibble with the Seventh Circuit’s preemptive determination that there were legitimate reasons for holding the retail shares and no compelling reasons not to on two potential grounds: the first that the court is substantively wrong on them (I haven’t formulated a full opinion on that yet), and the second that it is too early in the litigation process to determine that (in Tibble, for instance, it was clear that it was only on the actual facts learned in discovery that one could properly evaluate that issue, and one of the places that the Eighth Circuit, in Braden, broke from the Seventh Circuit was in allowing the plaintiffs to move forward with trying to prove the existence of issues beyond simply the holding of expensive shares). But it is fair to say that Loomis, like Tibble, rightly recognized the need to review whether there were proper alternatives to the retail share classes before determining whether or not holding them can constitute a fiduciary breach.

This means that, from a practical, boots on the ground perspective for those who build and run plans, the focus on diligent effort and investigation remains; what I always call defensive plan building, which is simply a catchy way of saying building a plan structure that will protect the fiduciaries against suit, continues to require putting in the effort of considering the propriety of different types of investment choices, and documenting that this was done. Do this, and it won’t – other than in terms of the amount of defense costs incurred before a case ends – matter one whit whether a suit is filed in the Seventh Circuit, in the Eighth Circuit, or before the same District Court judge who ruled in Tibble.