IMHO: Court “Case”

The amicus brief had the DoL once again weighing in on another in the series of revenue-sharing suits that have kept the industry stirred up since the first wave was filed in 2006. Once again the DoL was expressing its sense – that there were real, and triable, issues in the case, this one involving Exelon Corporation (see Solis Asks Court to Overturn Exelon Excessive Fee Case Decision).  

The DoL had previously expressed similar concerns about a similar dismissal in the same judicial district in a case involving Deere & Co. (see Hecker Fee Case Prompts Exelon Suit Dismissal) – a dismissal that was affirmed by the appellate court, and that the U.S. Supreme Court has refused to reconsider. 

Those concerns weren’t enough to influence the appellate court in the Hecker case, though it did result in a judicial addendum that sought to limit the broader applicability of its reasoning to cases outside the specific facts in the Hecker case (see 7th Circuit Panel Limits Ruling’s 404(c) Effects).That said, the same court rejected the plaintiff’s arguments in Loomis v. Exelon Corp. as being nearly identical to those in Hecker – and dismissed it just as summarily.

Retail Fail?

In its most recent filing, the Labor Department sought to distinguish the two cases, noting that it wasn’t just the mere allegation that a large plan paid was offering mutual funds with “retail level fees”, but that that – since those participants weren’t receiving services beyond those of any retail customer, that those fees were, at least arguably, excessive ⁽¹⁾.In fact, the DoL’s amicus brief noted that “By continually returning to the point that the panel’s opinion was limited to the particular facts as alleged, Hecker clearly and deliberately left the door open for other cases like this one in which the allegations about fees are tied directly to allegations about services”.

The Labor Department also took issue with the court’s admonitions that fiduciaries had no obligation to “scour the market” for the cheapest fees.“..the holding that fiduciaries are not duty-bound to “scour the market” to find the lowest possible fees should not be read to mean they are free to pay any fee the market bears, without making a diligent effort to assure that they are getting reasonable services for the fees comparable to what prudently managed plans of similar size and type plans also pay”.

And the DoL also said that the district court made a mistake by “…ruling instead, without inquiry, that the mere existence of fee ratios comparable to those in Hecker (.03 to .96% in this case) meant that the fees must be reasonable and prudently selected…”.Indeed, the DoL noted that “Nothing in ERISA or Hecker establishes that a particular numerical range of fees is either per se prudent or per se imprudent, or authorizes the courts to fashion a simple numerical test, without regard to what the evidence actually shows after the plaintiffs have been given an opportunity to present their case at trial or on summary judgment.”While the court’s reliance on Hecker as a basis for dismissal drew most of the DoL’s focus, it also pointed out that “In an ERISA case alleging excessive fees in terms very similar to the allegations at issue here, the Eighth Circuit, reversing the district court’s grant of a motion to dismiss, recently recognized the presumptive inappropriateness of dismissing a prudence claim at the pleadings stage⁽²⁾.

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⁽¹⁾ Unlike the Hecker plaintiffs, the Exelon plaintiffs make very clear that they have not received more services for the same amount of money, and therefore the fees are not appropriate for an institutional investor….

The participants’ amended complaint distinguished it from the one in Hecker by specifically alleging that the challenged fees were too high, not just in the abstract, but in relation to the services received.

⁽²⁾ In Braden v. Wal-Mart, 588 F.3d 585, 595 (8th Cir. 2009), the court held that the plaintiff met the pleading requirements of Twombly and Iqbal, and was not required to plead additional facts explaining precisely how the fiduciaries’ conduct was unlawful (see 8th Circuit Says Wal-Mart 401(k) Suit Requires Further Discussion at http://www.plansponsor.com/8th_Circuit_Says_WalMart_401k_Suit_Requires_Further_Discussion.aspx).

However, at the heart of the DoL’s stance is, as it has been before, that the plaintiffs in the Exelon case had presented a case sufficient to be entitled to their day in court – and that the court’s dismissal of those claims was too preemptory ^{(3), (4)}, too willing (though, IMHO, not perhaps in so many words) to apply a presumption of prudence to the decisions of the fiduciaries ⁽⁵⁾.

What we don’t know yet, of course, is how much extra in type or number of services might be required to justify the payment of retail-level fees by a retirement program (especially a large one)⁽⁶⁾, what kind of differential in penalties a court might apply if it found a “reasonable” gap – or if the 7^th Circuit will reconsider its threshold for making that case.

However, what we can, IMHO, reasonably infer is that the Labor Department thinks it should – and that the fiduciary threshold for a plan, certainly a large plan, is, and should be, more than merely paying retail-level fees for retail-level service.

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⁽³⁾ Considering the fact-intensive nature of most ERISA fiduciary-breach claims, and the near monopoly defendants often have over many of the determinative facts, the statutory scheme militates against dismissal at the pleadings stage in the ordinary fiduciary-breach case.

⁽⁴⁾It was therefore error for the district court to decide at this stage that under any plausible inference based on the facts as alleged, the defendants could not possibly have acted imprudently when they selected investment options charging retail-level fees and providing retail-level services without, according to the allegations, attempting to obtain the fees (or services) that plans of comparable size are expected to secure in the institutional-fund market.

⁽⁵⁾ For the reasons stated above, the dismissal was error, not only because it was based on a misreading of Hecker, but because it misapplied the established pleading standards and gave the benefit of the doubt to the wrong party.

⁽⁶⁾ While the DoL’s amicus brief was technically in support of giving the plaintiffs an opportunity to plead their case, it also tipped its hand on what those findings might mean.  “It (the plaintiff suit) alleges that the Plan fiduciaries breached their statutory duties by imprudently selecting Plan investment options that were unreasonably expensive for the plan's size and bargaining power and did not provide services commensurate with their high fees. Such conduct, if true, would constitute a breach of fiduciary duty under ERISA and would make the responsible fiduciaries liable for any resulting losses.”

See also IMHO: The "Burden" of Proof at http://www.plansponsor.com/IMHO___The_“Burden”_of_Proof.aspx