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New Jersey Employers Take Heed: Third Circuit Weighs in on 401(K) Plan Investment Options

October 2011

Recently, the Third Circuit Court of Appeals, in Renfro v. Unisys Corp. (“Renfro”), addressed the issue of whether an employer sponsor of a 401(k) plan breaches its fiduciary duties to plan participants and beneficiaries under the Employee Retirement Income Security Act of 1974, as amended (“ERISA”), by selecting “retail” mutual funds. Such funds, which are offered to the general public in addition to institutional investors (for instance, employee benefit plans with sufficiently large asset levels), tend to require lower initial contributions but carry higher fees than their institutional class counterparts, which generally are offered only to institutional investors.

Unisys Corp. (“Unisys”) offered its employees a 401(k) plan that included 73 investment options, comprised of 67 mutual funds, four commingled pools, one stable value fund and one employer stock fund. Further, the retail mutual funds included funds with a variety of risk and fee profiles, including low risk and low fee options. In a putative class action suit, the 401(k) plan plaintiffs sued Unisys (Fidelity, the plan’s trustee, also was sued) for breach of fiduciary duty under ERISA. The plaintiffs argued that Unisys breached its duties of loyalty and prudence to plan participants by selecting retail class funds rather than institutional class funds and/or by failing to use the size of its plan as leverage to bargain for lower fee rates on the retail class funds selected.

The court concluded in Renfro that Unisys did not breach its fiduciary duties of loyalty and prudence under ERISA. In so doing, the court noted that the range of investment selections in Unisys’ plan was “much closer” to the range in a 2009 Seventh Circuit case, Hecker v. Deere & Co. (“Hecker”), than to the range in a 2009 Eighth Circuit case, Braden v. Wal-Mart Stores, Inc. (“Braden”). In Hecker, the court concluded that the company did not breach its fiduciary duties of loyalty and prudence; its plan contained 23 mutual funds, two managed investment funds, an employer stock fund and a brokerage window granting access to 2,500 other funds managed by a variety of companies. In contrast, in Braden, the plan contained 10 retail mutual funds, a collective trust, an employer stock fund and a stable value fund. Consequently, the court in Braden held that the plaintiff participants had stated a claim for breach of ERISA’s “twin duties of loyalty and prudence.”

The Third Circuit’s decision in Renfro raises very important questions for a New Jersey employer that sponsors a 401(k) plan to consider: How many and what mix of investment options is appropriate for its plan? Renfro implies that an employer should offer more than 10 to 13 investment options; it also implies that an employer that offers 23 to 26 investment options plus a broad brokerage window has offered a sufficiently wide mix (at least if retail funds with different risk and fee profiles are offered).

The challenge for the New Jersey employer lies in the absence of any clear answers to these questions. Each employer will need to evaluate, perhaps with legal counsel and investment professionals, its 401(k) investment line-up for diversification among asset classes, fee structures, fund class (retail vs. institutional or other less expensive classes), risk profiles and investment strategies. An investment policy statement appears to be an absolute necessity. In the words of the Renfro court, “the range of investment options and the characteristics of those investment options – including the risk profiles, investment strategies, and associated fees – are highly relevant and ascertainable facts against which the plausibility of claims challenging the overall composition of a plan’s mix and range of investment options should be measured.” 

For more information, please contact:

Adam B. Cantor ¦ Member of the Firm ¦ (973) 530-2020 ¦ acantor@wolffsamson.com
Carl B. Levy ¦ Of Counsel ¦ (973) 530-2035 ¦ clevy@wolffsamson.com
Farah N. Ansari ¦ Associate ¦ (973) 530-2044 ¦ fansari@wolffsamson.com