Brian Loomis v. Exelon Corporation

In the
United States Court of Appeals
For the Seventh Circuit
Nos. 09-4081 & 10-1755
BRIAN LOOMIS, et al.,
Plaintiffs-Appellants,
v.
EXELON CORPORATION, et al.,
Defendants-Appellees.
Appeals from the United States District Court
for the Northern District of Illinois, Eastern Division.
No. 06 C 4900—John W. Darrah, Judge.
ARGUED SEPTEMBER 13, 2010—DECIDED SEPTEMBER 6, 2011
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 (pro-
ducing confusion), or too expensive funds (meaning that

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2 Nos. 09-4081 & 10-1755
the funds’ ratios of expenses to assets are need-
lessly 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 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

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Nos. 09-4081 & 10-1755 3
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 “institu-
tional” investment vehicles. Some mutual funds offer
a separate “institutional” class of shares, and Exelon’s
Plan also could have participated in trusts and invest-
ment 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

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4 Nos. 09-4081 & 10-1755
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 “whole-
sale” 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 Re-
hearing 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., 2011 U.S.
App. LEXIS 17208 (3d Cir. Aug. 19, 2011); Braden v. Wal-

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Nos. 09-4081 & 10-1755 5
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., 130 S. Ct. 1418
(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 argu-
ment that was not presented to the panel in Hecker: that

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6 Nos. 09-4081 & 10-1755
the Plan should have paid the expenses directly, allowing
participants to reap the gross rather than the net re-
turn. 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 par-
ticipants. 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 (1999); Lock-
heed Corp. v. Spink, 517 U.S. 882 (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 vehi-
cles, 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

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Nos. 09-4081 & 10-1755 7
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.
One reason Hecker rejected this argument that the
administrator’s fiduciary duties require limiting choices
to “institutional” funds is that “retail” funds, being
open to the public, give participants the benefits of com-
petition. A pension plan that directs participants into
privately held trusts or commingled pools (the sort of
vehicles that insurance companies use for assets under
their management) lacks the mark-to-market benchmark
provided by a retail mutual fund. It can be hard to tell
whether a closed fund is doing well or poorly, or
whether its expenses are excessive in relation to the
benefits they provide. It can be hard to value the
vehicle’s assets (often real estate rather than stock or
bonds) when someone wants to withdraw money, and
any error in valuation can hurt other investors.
A helpful amicus brief filed by the Investment
Company Institute tells us that the average expense
ratio of institutional-share classes in equity funds in 2009
was 1.09%, which is higher than that of any of the retail
funds offered to the participants in Exelon’s Plan. (The
ICI calculates the average expense ratio of retail equity
funds at 0.76%.) Likely the professional investors who

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8 Nos. 09-4081 & 10-1755
negotiate for these investments are getting something
extra for the money, but this expense ratio is not com-
patible with plaintiffs’ belief that institutional shares
always have lower expenses. Meanwhile, institu-
tional investment vehicles come with a drawback: lower
liquidity. The retail funds that Exelon offers allow daily
transfers. Participants can move their money from one
vehicle to another whenever they wish, without paying
a fee. In retirement, they can withdraw money daily.
Institutional trusts and pools do not offer that choice.
It is not clear that participants would gain from
lower expense ratios at the cost of lower liquidity.
Plaintiffs treat the situation as one in which Exelon,
whose retirees have more than $1 billion in the Plan, could
exercise “buying power” by negotiating lower fees in
exchange for a promise to place more money with a
given investment manager, while demanding the same
retail services (such as daily transfers) for which
mutual funds charge their normal expenses. Alterna-
tively, plaintiffs contend, Exelon could use its “buying
power” to insist that mutual funds charge a capitation
fee (an annual flat price per investor) in lieu of expenses
as a percentage of capital under management.
Now it isn’t clear to us why mutual funds would offer
lower prices just because participants in this Plan have
pension wealth that in the aggregate exceeds $1 billion.
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. The expenses of retail funds

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Nos. 09-4081 & 10-1755 9
derive in large measure from the need to deal with inves-
tors one at a time: to receive and mail small checks, to
print and mail individual prospectuses and account
statements, frequently to exchange modest sums from
one fund to another, and so on. Expenses per dollar
under management necessarily are higher if the
average account is $100,000 than if it is $100,000,000.
Hertz gets a fleet discount from General Motors when
it orders 10,000 cars at a time, but Hertz does not
secure fleet discounts for members of its #1 Club to buy
their own GM cars; retail transactions occur at retail
prices. So too with retail transactions in mutual funds.
Likewise it isn’t clear to us why participants would
view a capitation fee as a gain. 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. (The
same holds true if plaintiffs’ argument is limited to fees
of the Plan’s own recordkeeper; flat payments per par-
ticipant may help some participants but hurt others,
depending on the size of each participant’s account.)
Even if a restructured means of covering a fund’s costs
would benefit participants, it is not something that
Exelon could achieve. Mutual funds are regulated under
the Securities Act of 1933, the Securities Exchange Act
of 1934, and the Investment Company Act of 1940. These
statutes, and their implementing regulations, require
mutual funds to treat alike all investors holding the

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10 Nos. 09-4081 & 10-1755
same class of shares. See 17 C.F.R. §270.18f–3. So the
sponsor of a mutual fund could not agree with Exelon to
offer a special deal (lower expense ratios, capitation fees
rather than expenses paid from account balances) while
giving participants the same rights as retail investors.
And it could be hard to establish a separate class of
shares, limited to Exelon. That might run afoul of the
1940 Act’s rule against senior securities, 15 U.S.C.
§80a–18(f), or the Internal Revenue Code’s rule against
preferential dividends from investment companies, 26
U.S.C. §562(c). (A mutual fund’s failure to charge ex-
penses against certain investors would be economically
equivalent to a preferential dividend.)
Pension plans’ sponsors could get around these limits
by creating in-house or captive mutual funds, which
then would have only one class of shares and one set of
rights. But captive funds run into the sort of problems
we discussed above. They offer less choice (participants
would have 1 or 2 options, not the 32 Exelon currently
offers); they also are less liquid, less diversified, and
may be harder to value. And a captive fund also would
be smaller, so the expense ratio per dollar under man-
agement could be higher, especially if the fund had
some expenses that do not vary with the amount under
management. (The cost of writing a registration state-
ment and prospectus, for example, is largely fixed, so
the smaller the fund the larger this expense looms as
a percentage of invested capital.)
Plaintiffs’ theory is paternalistic. They appear to believe
that participants should prefer captive funds, even with

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Nos. 09-4081 & 10-1755 11
loss of liquidity, and should not be allowed to invest in
the funds from the Fidelity Group that Exelon’s Plan
now offers. According to plaintiffs, participants like
these mutual funds for “the wrong reasons,” such as
advertising. Since the seminars that Exelon offers have
not dissuaded the participants from continuing to
commit what plaintiffs call mistakes, they want the judi-
ciary to force Exelon to make these investments impos-
sible. Hostility to advertising has a long history, re-
flecting a belief that advertising is costly and thus
must drive price up; but available data suggest that
advertising promotes competition, which drives price
down by more than the costs of the ads. See, e.g., Lee
Benham, The Effect of Advertising on the Price of Eyeglasses, 15
J.L. & Econ. 337 (1972); Craig A. Depken II & Dennis P.
Wilson, Is Advertising Good or Bad?, 77 J. Business S61
(April 2004); John Rizzo, Advertising and Competition in
the Ethical Pharmaceutical Industry, 42 J.L. & Econ. 89 (1999).
For current purposes, it does not matter whether ad-
vertising is good or bad; all that matters is the absence
from ERISA of any rule that forbids plan sponsors to
allow participants to make their own choices. Far from
reflecting a paternalistic approach, the safe harbor in
§1104(c) encourages sponsors to allow more choice to
participants in defined-contribution plans. 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.

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12 Nos. 09-4081 & 10-1755
This concludes our discussion of the merits. Plaintiffs
have filed a second appeal, No. 10-1755, from the district
court’s award of some $42,000 in costs to Exelon. 2010
U.S. Dist. LEXIS 24405 (N.D. Ill. Mar. 11, 2010). The
district court relied on Fed. R. Civ. P. 54(d), which says
that prevailing parties presumptively recover their
costs. Plaintiffs reply that there is an exception.
Rule 54(d)(1) begins: “Unless a federal statute, these
rules, or a court order provides otherwise”. They
contend that 29 U.S.C. §1132(g)(1) “provides otherwise”.
It reads: “In any action under this subchapter (other
than an action described in paragraph (2) [to enforce
§1145]) by a participant, beneficiary, or fiduciary, the
court in its discretion may allow a reasonable attorney’s
fee and costs of action to either party.” Section 1132(g)(1)
gives the district judge more discretion than does
Rule 54(d), plaintiffs contend, and therefore supersedes
the rule. Plaintiffs then assert that an award of attor-
neys’ fees under §1132(g)(1) depends on a finding that
the plaintiff sued in bad faith or in order to harass; an
award of costs must depend on the same standard, the
argument continues. The district court did not order
plaintiffs to pay Exelon’s attorneys’ fees under §1132(g)(1)
and therefore, the argument wraps up, cannot properly
order plaintiffs to pay costs either.
One court of appeals has rejected this line of argument,
and none has accepted it. Quan v. Computer Sciences
Corp., 623 F.3d 870, 888–89 (9th Cir. 2010), holds that
§1132(g)(1) does not “provide otherwise” than Rule 54(d)
because it never forbids an award of costs. The ninth
circuit wrote: “To ‘provide otherwise’ than Rule 54(d)(1),

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Nos. 09-4081 & 10-1755 13
the statute or rule would have to bar an award of costs
to a prevailing party.” 623 F.3d at 888 (emphasis in origi-
nal). We are skeptical about this conclusion. Rule 54(d)
establishes a presumption in favor of an award to the
prevailing party. A statute that established a presump-
tion against an award of costs, but without forbidding
one, would provide “otherwise” than the rule; similarly
a statute establishing a presumption that the winner
pays the loser’s costs would provide “otherwise” than
Rule 54(d), even though it did not forbid an award to
the winner.
Decisions in this circuit could be read both to support
and to reject the conclusion in Quan. Compare Nichol
v. Pullman Standard Inc., 889 F.2d 115, 121 (7th Cir. 1989),
with Quinn v. Blue Cross & Blue Shield Association, 161
F.3d 472, 478–79 (7th Cir. 1998). Our court has never
grappled directly with the subject, and it is not
appropriate to read oblique remarks as answering a
question not squarely posed. We need not resolve this
question definitively today, because one of the minor
premises in plaintiffs’ syllogism is wrong. Plaintiffs
believe that only a litigant who proceeds in bad faith, or
to harass, can be required to pay attorneys’ fees under
§1132(g)(1), and that bad faith therefore must be
essential to an award of costs. That’s not what §1132(g)(1)
says.
Section 1132(g)(1) authorizes a district “court in its
discretion [to] allow a reasonable attorney’s fee and costs
of action to either party.” The Supreme Court dis-
cussed the meaning of this language in Hardt v. Reliance

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14 Nos. 09-4081 & 10-1755
Standard Life Insurance Co., 130 S. Ct. 2149 (2010), and
held that “a court ‘in its discretion’ may award fees and
costs ‘to either party’ as long as the fee claimant
has achieved ‘some degree of success on the merits.’ ” 130
S. Ct. at 2152 (citations omitted). In other words, even
the ultimate loser could receive an award of attorneys’
fees and costs, if on the way to defeat the litigant won
a skirmish that conferred some legal benefit. See
Ruckelshaus v. Sierra Club, 463 U.S. 680, 694 (1983). A
district judge need not find that the party ordered to
pay fees has engaged in harassment or otherwise
litigated in bad faith. Language in some appellate
opinions declaring “bad faith” vital to an award under
§1132(g)(1) did not survive Hardt. (Whether other ap-
proaches, such as Bittner v. Sadoff & Rudoy Industries, 728
F.2d 820 (7th Cir. 1984), which analogized §1132(g)(1) to
the Equal Access to Justice Act, survived Hardt, is yet
another issue we can avoid until the answer matters.)
Both the rule and the statute give the district judge
discretion to decide whether an award of costs is ap-
propriate. Plaintiffs did not succeed on any issue in this
litigation, so the award could not run in their favor
under Hardt’s standard. Doubtless §1132(g)(1) gave the
district judge discretion to deny Exelon’s request for
costs—but then so did Rule 54(d). If the district judge
had understood Rule 54(d) to make an award in
Exelon’s favor mandatory, then a remand would be
necessary, but the judge recognized that he possessed
discretion. Plaintiffs stake their all on the proposition
that, under §1132(g)(1), attorneys’ fees and costs must
be awarded (or denied) together, and may be awarded

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Nos. 09-4081 & 10-1755 15
only to penalize misconduct by the losing side. Because
that’s not the statutory standard, we can leave to an-
other day the question whether §1132(g)(1) supersedes
Rule 54(d)(1) in some other situation.
AFFIRMED
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