Variety is the Spice of Life, at Least to Avoid Fiduciary Breach Claims

Are your 401(k) fees too high? Are you breaching your fiduciary duty? No question that this "fee" issue is becoming an increasingly hot topic, so let's take a look at the Third Circuit's decision in Renfro v. Unisys Corp. that came out last week. Originally, this action was brought as a breach of fiduciary duty claim where the participants alleged that the fiduciaries had "inadequately selected" the mix and range of plan investment options. The claim was that the plan might have had the opportunity to offer cheaper options. Factually, the plan's investment options consisted of 73 funds, 67 of which were retail mutual funds managed by the plan's service provider and added as part of a bundled service agreement with the provider. The participants claimed that the fees on the provider's mutual funds were excessive when compared to the services they provided, other mutual funds, and other types of investment options that could have been included. The trial court dismissed the case based on its finding that the plan's "sufficient mix of investments" did not support a fiduciary breach claim and the Third Circuit affirmed. In sum, just because other cheaper options may have been out there, at least a variety of options was offered and that was sufficient. To reach their conclusion, the 3rd Circuit looked to decisions in the 7th Circuit and the 8th Circuit and determined that the analysis hinges on the the characteristics of the mix and range of the investment options offered. So the determining factor was the reasonableness of the options offered in the aggregate. For example, the 7th Circuit concluded that a set of options that 23 retail mutual funds and a brokerage option with access to over 2,500 funds satisfied the fiduciary obligation. The 8th Circuit determined that a narrower range of options in a plan that offered only 13 investment options, 10 of which were retail mutual funds, was not acceptable and upheld a claim for breach of fiduciary duty. So the 3rd Circuit decided that because the menu of options available had a "variety of risk and fee profiles, including low-risk and low-fee options," the breadth of the options weighed in favor of a dismissal of a claim for breach of fiduciary duty. This is not to say that more investment options will always be better. The court seemed particularly focused more on the range and mix. Certainly a variety of options, both in terms of investment strategy and fees, was a key component. For example, offering 3 large-cap stock funds may not be enough if all three have the same fee component. Plan sponsors would do well to consider offering a mix of fee options. To do that, plan sponsors have to make themselves aware of the fees charged. Which brings us back to the whole debate about reporting. Participants not only need to know the risk and have various options to control that risk, but they also have to have variety of fee options (and be told which investments cost less).

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