Appellate Court Rejects Another Revenue-Sharing Case

Another plan sponsor has prevailed in a revenue-sharing case – and at the appellate court level. 

This time the case was Loomis v. Exelon, a case argued before the 7th U.S. Circuit Court of Appeals, which had previously weighed in on the case that appears to be setting the tone in most of these cases, “Hecker v. Deere & Co.”    In Loomis, Exelon employees had argued that the company breached its fiduciary duties to its 401(k) by providing investment options requiring the payment of excessive fees. (see Court Tosses 401(k) Participants’ Request for Investment Losses Relief). 

Here the 7th Circuit noted that “the district court decided that the current suit is a replay of Hecker and dismissed it on the pleadings,” and, despite some discussion of the issues, upheld the lower court’s dismissal – with prejudice – of the case.  Writing for the court, Chief Judge Easterbrook concluded, “Unless Hecker is to be overruled, our plaintiffs cannot prevail” – and was clearly in no mood to overrule its own determination in the Hecker case.

The Department of Labor had argued in a friend of the court brief that, in dismissing the Exelon employees’ Employee Retirement Income Security Act fiduciary duty claims, the trial court required an “unduly high pleading standard” not contemplated by ERISA. Solis’s also contended the lower court misread the 7th Circuit’s ruling in Hecker.  

Exelon Offerings

In this particular case, the Exelon plan offered 32 funds, 24 of them mutual funds open to the public, with expense ratios ranging from 0.03% to 0.96%.  According to the court, the plaintiff-participants contend that the plan administrators violated their fiduciary duties under ERISA by offering “retail” mutual funds, and in “requiring participants to bear the economic incidence of those expenses themselves, rather than having the Plan cover these costs”.  Here the court noted that “all of these funds were also offered to investors in the general public, and so the expense ratios necessarily were set against the backdrop of market competition”  Additionally, the 7th Circuit was persuaded that participants had available a “wide range” of options.  The court also restated its holding in Hecker, that “nothing in ERISA requires every fiduciary to scour the market to find and offer the cheapest possible fund.” 

Regarding the inclusion of those retail funds on the menu, the court noted that “Both Exelon and the funds distribute literature and hold seminars for the participants, educating them about how the funds differ and how to identify the low expense vehicles. Plaintiffs do not contest the adequacy of the Plan’s and the funds’ disclosures. What plaintiffs contend instead is that, if a pension plan offers only “institutional” vehicles, fees will be lower on average, and that participants tempted by a high-expense fund might save.”   

The 7th Circuit did delve into some new waters regarding the motivations of the plan sponsor in offering those retail funds, but ultimately noted that “…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. That enables Exelon to recruit better workers, or reduce wages and pension contributions without making the total package of compensation (wages plus fringe benefits) less attractive.”  The court went on to assert that “competition thus assists both employers and employees, as Hecker observed”, a finding it held in contrast with plaintiffs in an 8th Circuit case involving Wal-Mart employees where it was alleged that that the plan sponsor limited participants’ options to ten funds as a result of kickbacks.  “Nothing of the sort is alleged in this case,” the 7th Circuit justices noted.

The Exelon ruling included a discussion over the relative advantages of retail mutual funds compared with “institutional” offerings that might not be as liquid and/or transparent, noted that the expenses of those retail funds in the Exelon plan were lower than averages provided by the Investment Company Institute (ICI), and also wondered aloud “…why mutual funds would offer lower prices just because participants in this Plan have pension wealth that in the aggregate exceeds $1 billion”.  The court noted that “Exelon can’t commit that sum, or any portion of it, to any one fund without abandoning the arrangement under which the participants themselves choose where their money will be invested”.

Regarding an alternative pricing scenario put forth by plaintiffs, the court cautioned that “A flat-fee structure might be beneficial for participants with the largest balances, but, for younger employees and others with small investment balances, a capitation fee could work out to more, per dollar under management, than a fee between 0.03% and 0.96% of the account balance.” 

As for whether the employer was under some kind of obligation to underwrite the plan fees, the court said “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.”


Ultimately, the 7th Circuit held that “Exelon offered participants a menu that includes high-expense, high-risk, and potentially high-return funds, together with low-expense index funds that track the market, and low-expense, low-risk, modest-return bond funds. It has left choice to the people who have the most interest in the outcome, and it cannot be faulted for doing this.”

The case is online at