IMHO: “Better” Business

There was another judicial decision in another revenue-sharing case earlier this month—and another victory for a plan sponsor.


The case was Loomis v. Exelon, a case argued before the 7th U.S. Circuit Court of Appeals (see Appellate Court Rejects Another Revenue-Sharing Case), which had previously weighed in on the case that appears to be setting the tone in most of these cases, “Hecker v. Deere & Co.”  Hecker, as you may recall, involved a situation with a large, multi-billion-dollar plan that offered its participants access to a couple of dozen funds from a single provider alongside a self-directed brokerage window that afforded access to funds beyond that (see Appellate Court Backs Revenue-Sharing Case Dismissal).  The 7th Circuit dismissed that challenge, finding that the competitive forces of the market were sufficient to ensure reasonable fee levels for the specific funds on the menu, and that, if the participants felt otherwise, they could always pursue other options via the brokerage window.

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In Exelon, there was no brokerage window, though there were 32 fund options, mostly (24) mutual funds—mutual funds that were retail-class funds.  Once again, the 7th Circuit 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,” and restated its holding in Hecker that “nothing in ERISA requires every fiduciary to scour the market to find and offer the cheapest possible fund.”   And then the court launched off into what, IMHO, was an odd juxtaposition of the benefits of those retail funds against “institutional” funds, which it claimed don’t offer the same level of liquidity, transparency, and ability to benchmark against comparable investments.  Really?  Have they never heard of an “I” share1?

I once opined that, based on the Hecker decision, I would advise plan sponsors to give “participants LOTS of fund choices —via a brokerage window if possible—and I would make sure that there were at least some low-cost fund choices available via that window,” and that, among other things, I wouldn’t concern myself “overly much with the fees paid by the plan/participants—so long as those fees were paid via mutual fund expense ratios that are the same as those paid by investors in the retail market” (see IMHO:  “‘Winning’ Ways?”).  It was a tongue-in-cheek remark, of course, but the Hecker decision struck me as heavily – perhaps too heavily – dependent on free-market principles: Participants weren’t forced to put money in the plan, those who chose to do so weren’t forced into any particular option, and the fees associated with those options were, almost by definition, reasonable since they were subject to free and fair market forces. 

That same court was similarly inclined here—and, if you can’t embrace the rationale, one can at least appreciate the consistency.   


1 in fairness, the Exelon court did acknowledge the existence of instutional class holdings.  It just didn’t accord their advantages/comparability any substance in their analysis.  

More than that, in this case, the 7th Circuit noted that Exelon had no real motivation to put “bad” fund options on the retirement plan menu.  “[T]here 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. Competition thus assists both employers and employees, as Hecker observed.”

The question here isn’t whether Exelon, or any employer, reaps personal benefit from the plan, or how it is structured.  Employers do, of course, reap the recruiting/retention benefits of providing a robust and competitive package of benefits, alongside certain tax benefits—though, in my experience, these pale in comparison to the investment of time, money, and effort required.  The decision to offer a plan, like the decision to participate, is voluntary.  Bad law and intrusive regulation can weigh on the former, and poor plan design and lax administration can surely restrain the latter.

ERISA fiduciaries are, however, not merely expected to offer a “competitive” program, nor is it enough to simply steer clear of arrangements that enrich their bottom line at the expense of participants.  Rather, every plan decision is supposed to be not just in the interests, but in the BEST interests, of participants, and from the perspective—or with the assistance—of experts in the field. 

That test may, of course, be satisfied by merely offering access to the same types of investments available to retail investors, but that doesn’t mean we shouldn’t expect—better.