Few employees that participate in an employer-sponsored 401(k) plan question whether the plan is paying excessive fees to the funds it offers as investment options. We often just assume the plan, and the employer, are leveraging the buying power of the large amount of assets held in the plan to secure the lowest possible fees for the participants. But this may or may not be true. One theory advanced in several cases so far is that when the 401(k) plan offers “retail” class mutual funds, rather than “institutional” class funds available at a lower cost, the plan fiduciaries are not meeting their fiduciary obligations. See, e.g., Loomis v. Exelon Corp., No. 10-1755 (7th Cir. Sept. 6, 2011).
The crux of the participants’ argument is that where a plan can use its size to negotiate lower fees, or where the same fund is available in both a lower-fee “institutional” class and a higher-fee “retail” class, the fund should opt for the lower cost alternative. The Court of Appeals for the Seventh Circuit, though, has disagreed with this rationale several times now. See, e.g., Hecker v. Deere & Co., 556 F.3d 575 (7th Cir. 2009). The court, however, reasoned that the employer, Exelon in this case, met its obligation because it provided an array of investment options to participants, some with lower fees.
The flaw I see in both the court’s reasoning, and the manner in which the participants presented the argument, is that it does not address the overall shift in attitude about plan expenses as the predominant plan type shifted from traditional pension plans to the modern 401(k) plans. In a defined benefit pension plan, participants were promised a certain benefit, and any plan expenses necessarily drove up the employer’s cost. The employers therefore were very savvy about paying plan expenses, using the plan’s size to leverage the best deals possible. But as we have shifted to the 401(k) being the predominant type of retirement plan, the participants and not the employer bear many of those expenses, such as fund and management fees. Are the employers really using the same level of diligence to defray expenses as they did when the expenses came from their own pockets?