Well, well, well. Here is the story – well-presented by two lawyers from Williams Mullen – of the Seventh Circuit deciding this month, in the case of Loomis v Exelon Corporation, that holding retail class mutual fund shares, rather than cheaper institutional share classes, in a defined contribution plan was not sufficient to establish fiduciary liability. Here is the decision itself.
Reading them together raises more than a few thoughts about the decision and the Court’s reasoning. I wanted to focus today on one particular point, which is that, as the authors of the article point out, the Seventh Circuit, in the opinion, continues its heavy reliance in rejecting excessive fee claims on the idea that marketplace competition is sufficient, in and of itself, to police the expense levels of retail class shares offered to plan participants. This idea is, in many ways, the theoretical foundation of the Seventh Circuit’s seemingly categorical rejection of excessive fee claims, with the Court reasoning that, if market forces have set those fee levels, it is appropriate for plan sponsors to offer them.
However, it is important to recognize what the Court is really saying in Loomis, which is that the mere holding of retail shares – without more – under circumstances in which their pricing is subject to market discipline is not a fiduciary breach; the Seventh Circuit’s rulings in this regard, including in Loomis, are best understood as meaning that something more than that must be shown to make out a fiduciary breach. The Court, in fact, seemed to recognize this when it claimed for its own the Eighth Circuit’s decision in Braden, asserting that it was consistent with the Seventh Circuit’s approach in Hecker (and thus by extension in Loomis) because “the plaintiffs in Braden alleged that the plan sponsor limited participants’ options to ten funds as a result of kickbacks; while adopting the approach of Hecker, the eighth circuit held this allegation sufficient to state a fiduciary claim under ERISA.” The Seventh Circuit then went on in its decision in Loomis to explain why none of the additional assertions of potential fiduciary misconduct, above and beyond simply holding retail class shares, alleged in Loomis was sufficient to demonstrate the existence of the type of additional conduct that constitutes a fiduciary breach, such as existed on the allegations in Braden.
Loomis is therefore not properly read as meaning that excessive fee claims are futile, although it certainly means, in the Seventh Circuit anyway, that alleging excessive fee claims based solely on the decision to hold retail share classes without more is futile. The authority is instead properly read as meaning that something more than that has to be attributed to the fiduciaries to sustain an excessive fee claim, and that this something more must add up on its own to a fiduciary breach. This means that one should put little stock in news flashes, articles and client alerts that claim that Loomis means that excessive fee claims are futile or that holding retail share classes is per se fine; rather, what Loomis means is that excessive fee claims are futile and that holding retail share classes is fine only if participants can find no additional aspect of the fee related decisions that falls below a fiduciary’s standard of care. This is a subtle but clear, and important, difference, one that can cost a plan sponsor a lot of money if that sponsor turns out to be the one that left retail funds in place under circumstances where that additional lack of diligence can be shown.
Further, as many readers know, the federal district court’s decision after trial in Tibble, now up on appeal to the Ninth Circuit, is seen by many as contrary to Hecker and as finding a fiduciary breach in a plan’s holding of retail, rather than institutional, shares. The trial court’s opinion in Tibble, however, did not really find a breach just for that reason, but instead found a breach due to the lack of prudence and diligent investigation by the fiduciaries that led to holding retail share classes. Understanding both Loomis and Tibble in their proper light suggests that they are more in harmony than would appear on first glance; both require something more than just the holding of the retail class shares alone to demonstrate an excessive fee claim and a corresponding breach of fiduciary duty.