Alert September 29, 2011

Third Circuit Upholds Dismissal of Action Asserting ERISA Fiduciary Violations in the Inclusion of Retail Mutual Funds within Menu for Participant-Directed 401(k) Plan

On August 19, a unanimous panel of the U.S. Court of Appeals for the Third Circuit affirmed the dismissal of the complaint in Renfro v. Unisys Corporation.

Renfro involved a 401(k) plan with $2 billion in assets that offered 73 different investment options from which participants could choose – including a stable value fund, an employer stock fund, four commingled (group trust) funds and 67 mutual funds.  The expense ratios of the available mutual funds – which included a number of retail mutual funds – ranged from 10 to 121 basis points.

Two plan participants brought a putative class action in the U.S. District Court for the Eastern District of Pennsylvania against the plan sponsor and the plan’s directed trustee (and certain of their affiliates), claiming they breached fiduciary duties of loyalty and prudence under ERISA §404(a) in selecting and retaining retail mutual funds as investment options under the plan. The plaintiffs asserted that the administrative fees set forth in the plan’s trust agreement and the fees associated with the retail mutual funds on the plan’s menu were excessive in relation to the services provided. They argued that other investment alternatives with lower fees should have been offered in lieu of the retail mutual funds, or that the plan fiduciaries should have used the plan’s size as leverage to bargain for lower fees from the mutual funds.

On a Rule 12(b)(6) motion, the district court dismissed the claims against the directed trustee and its affiliates, reasoning that they did not exercise control over the selection of plan investment options and therefore had no relevant fiduciary duties.  The court also dismissed the claims against the plan sponsor and its affiliates, finding that – because the plan offered a “sufficient mix of investments” for participants – no rational trier of fact could conclude that they had breached their fiduciary duties in offering that array of investment options under the plan.  In addition, the court granted the motion for summary judgment filed by the plan sponsor and its affiliates, ruling that they were protected from liability by ERISA §404(c), as the participants had chosen the investment options to which they allocated their plan accounts.

On appeal, the Third Circuit affirmed. With regard to the directed trustee (and its affiliates) the Court of Appeals noted that under ERISA “an entity is only a fiduciary to the extent it possesses authority or discretionary control over the plan.” The court concluded that neither the trustee nor its affiliates had any discretion over the selection or maintenance of plan investment options, and found in particular that the trustee was directed with regard to the options to be made available. In the Third Circuit’s view, “a directed trustee is essentially ‘immune from judicial inquiry’ because it lacks discretion, taking instructions from the plan that it is required to follow” (citing Moench v. Robertson, 62 F.3d 533 (3d Cir. 1995)). The Third Circuit also concluded that the trustee could not be subject to co-fiduciary liability under ERISA §405(a) based on the sponsor’s alleged breach in agreeing to pay the trustee (and its affiliates) excessive compensation, because the trustee did not act as a fiduciary in negotiating its own compensation and in any event had no actual knowledge of any fiduciary breach by the sponsor.

In addressing the claims against the plan sponsor (and its affiliates), the Third Circuit analyzed two prior circuit court opinions that dealt with complaints challenging fees charged in connection with investments made available under ERISA plans – Hecker v. Deere & Co., 556 F.3d 575 (7th Cir. 2009) and Braden v. Wall-Mart Stores, Inc., 588 F.3d 585 (8th Cir. 2009). In the Third Circuit’s view, these cases indicate that the proper focus in evaluating such a challenge is the “range of investment options and the characteristics of those included options – [e.g.,] the risk profiles, investment strategies, and associated fees.” In the case before it, the Third Circuit found that the plan had a reasonable range of investment options with a variety of risk profiles and fee rates, and therefore held that the complaint’s general assertions of imprudence and disloyalty failed to plausibly allege a claim of fiduciary breach.

Finally, the Third Circuit concluded that – because the district court had properly dismissed the claims against the plan sponsor (and its affiliates) under the reasoning described above – there was no need to address questions related to the grant of summary judgment based on ERISA §404(c) (and in particular whether §404(c) provides a defense against allegations that a fiduciary imprudently selected or monitored investment options).