Loomis v. Exelon Corp..

• Decision Date: 06 September 2011
• Docket Number: Nos. 09–4081,10–1755.,s. 09–4081
• Citation: 658 F.3d 667,51 Employee Benefits Cas. 1705
• Parties: Brian LOOMIS, et al., Plaintiffs–Appellants,v.EXELON CORPORATION, et al., Defendants–Appellees.
• Court: U.S. Court of Appeals — Seventh Circuit

658 F.3d 667

51 Employee Benefits Cas. 1705

Brian LOOMIS, et al., Plaintiffs–Appellants,

v.EXELON CORPORATION, et al., Defendants–Appellees.

Nos. 09–4081

10–1755.

United States Court of Appeals, Seventh Circuit.

Argued Sept. 13, 2010.Decided Sept. 6, 2011.

Jerome J. Schlichter, Michael A. Wolff (argued), Attorneys, Schlichter, Bogard & Denton, St. Louis, MO, for Plaintiffs–Appellants.Anne E. Rea, Attorney, Sidley Austin LLP, Chicago, IL, for Defendants–Appellees in No. 10–1755.Mark B. Blocker, Eric S. Mattson (argued), Kevin M. Fee, and Alison V. Potter, Sidley Austin LLP, Chicago, and Robert B. Stutz, Exelon Business Services Company, for Defendants-Appellees.Robin Springberg Parry (argued), Attorney, Department of Labor, Office of the Solicitor, Washington, DC, for Amicus Curiae, Hilda L. Solis, Secretary of the United States Department of Labor.Thomas Leon Cubbage, III, Attorney, Covington & Burling LLP, Washington, DC, for Amicus Curiae, Investment Company Institute and ERISA Industry Committee.Before EASTERBROOK, Chief Judge, and POSNER and TINDER, Circuit Judges.EASTERBROOK, Chief Judge.

Many defined-contribution pension plans offer participants an opportunity to select investments from a portfolio, which often includes mutual funds. In recent years participants in pension plans have contended that the sponsor offers too few funds (not enough choice), too many funds (producing confusion), or too expensive funds (meaning that the funds' ratios of expenses to assets are needlessly high). See, e.g., Hecker v. Deere & Co., 556 F.3d 575, rehearing denied, 569 F.3d 708 (7th Cir.2009); Howell v. Motorola, Inc., 633 F.3d 552 (7th Cir.2011); Spano v. Boeing Co., 633 F.3d 574 (7th Cir.2011); George v. Kraft Foods Global, Inc., 641 F.3d 786 (7th Cir.2011). The district court decided that the current suit is a replay of Hecker and dismissed it on the pleadings. 2009 WL 4667092, 2009 U.S. Dist. Lexis 114626 (N.D.Ill. Dec. 9, 2009).

Exelon's defined-contribution pension plan allows participants to choose how their retirement assets will be invested. It offers 32 options, including 24 mutual funds that are open to the public. These funds are no-load vehicles. In other words, they do not charge investors a fee to buy or sell shares. Purchases and sales occur at net asset value, calculated daily. A no-load fund covers its expenses by deducting them from the assets under management. So if these assets appreciate 10% in a given year, and the expenses come to 1%, investors receive a net gain of 9%; if the assets decline 5% in the market, investors' net return is –6% that year. The funds available to participants in the Exelon Plan have expense ratios ranging from 0.03% to 0.96%. The low-expense funds tend to be passively managed (index funds, for example, which do not make any independent investment choices but simply track a designated portfolio such as the Standard & Poor's 500 Index) and have features that discourage turnover (an index fund typically disallows new investments for a month or more following any withdrawal). The high-expense funds tend to be actively managed (that is, the fund's investment advisers try to find and buy underpriced securities while selling ones that the advisers think are overvalued) and to allow rapid turnover both in the funds' holdings and the participants' investments. Higher turnover means higher brokerage fees and higher administrative expenses.

Plaintiffs, participants in Exelon's Plan, contend that its administrators have violated their fiduciary duties under the Employee Retirement Income Security Act, see 29 U.S.C. § 1104(a), in two ways: by offering “retail” mutual funds, in which participants get the same terms (and thus bear the same expenses) as the general public; and by requiring participants to bear the economic incidence of those expenses themselves, rather than having the Plan cover these costs. Plaintiffs contend that Exelon should have arranged for access to “wholesale” or “institutional” investment vehicles. Some mutual funds offer a separate “institutional” class of shares, and Exelon's Plan also could have participated in trusts and investment pools to which the general public does not have access.

Similar arguments were made in Hecker but did not prevail. Deere offered 25 retail mutual funds with expense ratios from 0.07% to just over 1% annually. We held that as a matter of law that was an acceptable array of investment options, observing 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. The fact that it is possible that some other funds might have had even lower ratios is beside the point; nothing in ERISA requires every fiduciary to scour the market to find and offer the cheapest possible fund (which might, of course, be plagued by other problems).” 556 F.3d at 586. By offering a wide range of options, Hecker held, Deere's plan complied with ERISA's fiduciary duties.

Plaintiffs contend that the panel in Hecker retreated from this holding when denying a petition for rehearing. It did not. Two principal issues were disputed in Hecker: first, whether ERISA plans must offer “wholesale” or “institutional” funds; second, whether Deere's portfolio of funds was covered by a safe harbor, 29 U.S.C. § 1104(c), that made the answer to the first question irrelevant. The opinion denying rehearing principally concerned the second issue. (Exelon does not rely on § 1104(c).) The panel reaffirmed its negative answer to the first question, stating that plaintiffs

argued—and especially in their Petition for Rehearing they continue to argue—that the Plans were flawed because Deere decided to accept ‘retail’ fees and did not negotiate presumptively lower ‘wholesale’ fees. The opinion discusses a number of reasons why that particular assertion is not enough, in the context of these Plans, to state a claim, and we adhere to that discussion.

569 F.3d at 711. Unless Hecker is to be overruled, our plaintiffs cannot prevail. Two other circuits have agreed with Hecker. See Renfro v. Unisys Corp., ––– F.3d –––– (3d Cir.2011); Braden v. Wal–Mart Stores, Inc., 588 F.3d 585 (8th Cir.2009). Plaintiffs do not persuade us to overrule Hecker and create a conflict.

Nothing in Jones v. Harris Associates, L.P., ––– U.S. ––––, 130 S.Ct. 1418, 176 L.Ed.2d 265 (2010), undermines Hecker's analysis. The petition for rehearing in Hecker was denied three months after Jones came down. That case dealt with the fiduciary duties of investment advisers, which as the Court observed have a conflict of interest when seeking management fees from mutual funds under their effective control. Plaintiffs do not contend that the funds that Exelon selected had any control over it, or it over them; 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. Competition thus assists both employers and employees, as Hecker observed. (By contrast, the plaintiffs in Braden alleged that the plan sponsor limited participants' options to ten funds as a result of kickbacks; while adopting the approach of Hecker, the eighth circuit held this allegation sufficient to state a fiduciary claim under ERISA. Nothing of the sort is alleged in this case.)

True, the participants in Exelon's Plan press an argument that was not presented to the panel in Hecker: that the Plan should have paid the expenses directly, allowing participants to reap the gross rather than the net return. But whether to cover these expenses is a question of plan design, not of administration. The participants want Exelon to contribute more to the Plan than it does. 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. See, e.g., Hughes Aircraft Co. v. Jacobson, 525 U.S. 432, 119 S.Ct. 755, 142 L.Ed.2d 881 (1999); Lockheed Corp. v. Spink, 517 U.S. 882, 116 S.Ct. 1783, 135 L.Ed.2d 153 (1996). Fiduciary duties under ERISA are limited to a requirement of honest and prudent management of the assets that are under an administrator's control. So the participants' argument that Exelon should have ponied up additional money, to cover the operating expenses of their retirement vehicles, is a non-starter. What remains is the argument that flopped in Hecker: that Exelon should have offered only “wholesale” or “institutional” funds. Exelon's Plan has at least 8 options other than “retail” mutual funds, and plaintiffs do not complain about these; instead they insist that the number of “retail” funds must be zero.

Note that this is not an argument about the absolute level of fees. Any participant who wants a fund with expenses under 0.1% can get it through Exelon's Plan. Nor is it an argument that Exelon has left participants adrift and apt to blunder into the high-expense funds when they would be better off with the low-expense funds. Cf. Warren Bailey, Alok Kumar & David Ng, Behavioral biases of mutual fund investors, 102 J. Fin. Econ. 1 (2011). 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...