Most 401(k) plans permit a participant to direct the investment of his or her interest among available plan investment options. Typically, either the plan sponsor or an appointed committee has the authority under the plan to select the investment options. In the recent case of Renfro v. Unisys Corporation, (3d Cir. 2011), two participants in a Unisys 401(k) plan sought to hold Unisys and the plan's trustee, Fidelity Management Trust Co., liable for a breach of fiduciary duty arising out of the alleged inadequate selection of the mix and range of investment options. Renfro generated significant interest in the 401(k) industry because the case could have had far-reaching implications on the selection of investment options and the merits of a defense afforded to plan fiduciaries in the Third Circuit under ERISA Section 404(c).
The plaintiffs alleged that the selection of retail mutual funds (67 at the time of the filing of the plaintiffs' complaint were available options) by Unisys and Fidelity breached their duty of loyalty and prudence under ERISA because the administrative fees under the Fidelity trust agreement and the fees associated with the funds were excessive in light of the services rendered as compared to other, less expensive investment options not included in the plan. In brief, the plaintiffs claimed that Unisys could have selected investments, such as collective trusts or separately managed accounts, with lower fees or used its bargaining power to demand lower fees.
The Third Circuit held in favor of Unisys and Fidelity. With regard to the claims against Unisys, the Third Circuit looked first to the characteristics of the mix and range of options and then evaluated the plausibility of claims challenging fund selection against the backdrop of the reasonableness of the mix and range options. Because the plan offered 67 mutual funds with a variety of risk and fee profiles, four commingled funds, a stable value fund, and a Unisys stock fund, the Third Circuit found that it could not infer that the selection process was flawed and therefore, upheld the motion to dismiss.
Comments: Although it discusses the duties imposed on a fiduciary under ERISA, including the prudent man standard, and cites the ERISA regulation which provides that "an ERISA fiduciary acts prudently when it gives appropriate consideration to those facts and circumstances that, given the scope of such fiduciary's investment duties, the fiduciary knows or should know are relevant to the investment course of action involved," the Third Circuit appears to have reached the conclusion that an in-depth review of the process was not needed because offering enough choices with a range of characteristics necessarily meant that Unisys had met its fiduciary obligations under ERISA on the face of that offering.
Under the facts of Renfro, it was not a great leap to conclude that a participant had enough choices to meaningfully impact his rate of return despite the retail nature of the mutual funds. Consequently, Renfro may not provide meaningful guidance to a plan sponsor that may not desire to offer 67 mutual funds. In this latter case, the fiduciary charged with the selection and maintenance of investment options should be prepared to demonstrate that it engaged in a prudent process in arriving at the investment menu.