ERISA-Seventh Circuit Rules That Offering Retail Mutual Funds For Plan Investment Does Not Violate ERISA Fiduciary Duty

In Loomis v. Exelon Corporation, Nos. 09-4081, 10-1755 (7th Cir. 2011), the plaintiffs were participants in a self-directed defined contribution plan (the “Plan”) maintained by their employer, the defendant Exelon Corporation (“Exelon”). The Plan offered 32 investment options, including 24 “retail mutual funds”, that is, mutual funds open to investment by the public. The plaintiffs had brought suit against Exelon, alleging that the Plan’s administrators violated their fiduciary duty under ERISA in two ways: (1) by offering the retail mutual funds, in which the participants get the same terms and thus bear the same expenses as the general public and (2) by requiring participants to bear the economic incidence of those expenses themselves, rather than having Exelon cover these costs. Their case was dismissed by the district court, and the plaintiffs appealed.

As to claim (1), the plaintiffs contended that Exelon should have arranged for access to “institutional mutual funds” as Plan investment options. In that type of fund, the plaintiffs said, the cost of investment and the expenses are negotiated by the fund and the Plan, and thus will be more favorable to participants than with the retail mutual funds. However, the Court rejected this argument and thus claim (1). Generally, building on its decision in Hecker v. Deer (7th Cir. 2009), the Court said that it found no evidence that institutional mutual funds provide a better investment for the Plan participants than the retail mutual funds. As to expenses in particular, the expenses borne by participants when they invest in retail mutual funds are set by market competition, as those funds are offered to the public. There is no guarantee that negotiations with the institutional mutual funds will produce lower expenses. To the contrary, the Court pointed to an amicus brief filed by the Investment Company Institute, which indicates that institutional mutual funds have higher expenses than any of the retail mutual funds offered for investment by the Plan. Further, the institutional mutual funds have the drawback of lower liquidity, meaning restrictions on exchanges out of the fund, while the retail mutual funds offer daily exchanges.

As to claim (2), the Court said that having participants, rather than Exelon, bear the investment expenses is a matter of plan design. It is not a fiduciary issue, and therefore cannot lead to a breach of fiduciary duty under ERISA. Nothing in ERISA requires the employer to pay any plan expenses. Thus, the Court rejected claim (2). Since it rejected both claim (1) and claim (2), the Court affirmed the district court’s dismissal of the case.

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