The ERISA Litigation Newsletter - April 2011

Editor's Overview

This month, we highlight the Renfro v. Unisys class action pending before the Third Circuit. The Renfro plaintiffs challenged the reasonableness of retail mutual funds as 401(k) plan investment options, as well as the applicability of the Section 404(c) defense to fiduciary breach claims. The Third Circuit heard oral argument on March 7, and its impending decision is expected to have far-reaching implications with respect to what types of investment vehicles 401(k) plan sponsors will be able to offer, and the scope and application of the Section 404(c) safe harbor.

A second article examines the viability of "hybrid" lawsuits in which plaintiffs seek relief for alleged violations of the Fair Labor Standards Act, while also asserting that the alleged compensation errors deprived them of the full value of ERISA plan benefits, thus giving rise to an ERISA claim for breach of fiduciary duty. Permitting these "hybrid" actions to proceed could lead to a substantial expansion in the scope of ERISA fiduciary responsibilities because imposing a fiduciary duty to monitor compensation could extend, not merely to FLSA issues, but to other statutory issues as well, such as employment discrimination.

As always, be sure to review the section on Rulings, Filings, and Settlements of Interest.

Renfro v. Unisys: What's at Stake?1

Contributed by Amy R. Covert

Currently pending before the Third Circuit Court of Appeals is plaintiffs' appeal of the district court's decision in Renfro v. Unisys, No. 07-2098, 2010 WL 1688540 (E.D. Pa. Apr. 26, 2010).2 Renfro is one of over a dozen nearly identical putative class actions that were commenced in 2006 by the same law firm against some of the nation's largest employers, their 401(k) plans, and the fiduciaries of those plans. As in the other actions, plaintiffs in Renfro assert that Unisys Corporation and Fidelity Management Trust Company breached their fiduciary duties under ERISA by offering investment options with allegedly excessive fees in participant-directed 401(k) plans. As with many of the other suits, plaintiffs complain that defendants did not take advantage of the plan's large size to obtain lower fees or increased services for plan participants.

On April 29, 2010, United States District Judge Berle M. Schiller of the United States District Court for the Eastern District of Pennsylvania dismissed the putative class action complaint, holding that Unisys did not breach its fiduciary duties and that Fidelity was not a fiduciary under ERISA. As suggested by the seven amicus curiae filings, including briefs submitted by the Department of Labor (DOL), the Chamber of Commerce of the United States, the Investment Company Institute, and the Securities Industry and Financial Markets Association, the Third Circuit's decision could have far-reaching implications, in terms of both the types of investment vehicles that plan sponsors will be able to offer in participant-directed 401(k) plans, and the scope and application of the defense afforded to plan fiduciaries under ERISA Section 404(c).3

Background

Plaintiffs were participants in the Unisys Corporation Savings Plan (Plan), which provides individual accounts for each Plan participant. As is typically the case with 401(k) plans, a participant's benefits under the Plan are determined by the amounts contributed to his or her account and any income, gains, and losses that may be allocated to the account as a result of the participant's investments. Plan participants decide how to allocate their money among the different investment options in the Plan after receiving detailed information about the investments' historical performance, the managers' investment strategies, and the associated fees and expenses. During the period in question, the Plan offered over 70 investment options with varying fees, risks, and potential rewards, including commingled pools, index funds, bond funds, funds representing parts of the global economy, and a money market fund. The funds offered had fees ranging from as little as 0.10% to as high as 1.21%. From 2000 to 2007, the total assets in the Plan exceeded $2 billion, with the total number of Plan participants exceeding 30,000.

Pursuant to the agreement entered into with Fidelity Management Trust Company (FMTC), FMTC agreed to provide a wide variety of services, including recordkeeping, participant education and communication, reviews with plan sponsors, and trustee services such as facilitating the monetary inflows and outflows of the Plan. FMTC delegated certain of these tasks to its affiliate, Fidelity Investments Institutional Operations Company, Inc. The trust agreement stipulated that the only mutual funds that could be offered to Plan participants were those advised by Fidelity Management & Research Company; however, Unisys could add additional investment options with FMTC's consent.

The Renfro Litigation

Plaintiffs filed a putative class action complaint against Unisys and its Plan fiduciaries (collectively, the Unisys Defendants) and FMTC and affiliated entities (collectively, the Fidelity Defendants). The complaint alleged that defendants breached their fiduciary duties by including retail mutual funds as investment options in the Plan. Plaintiffs contended that participants and beneficiaries were forced to pay excessive administrative and investment management fees, and complained that Defendants did not take advantage of the Plan's large size to negotiate lower fees or increased services for Plan participants and beneficiaries.

Both the Unisys and Fidelity Defendants moved to dismiss the complaint. Unisys also moved in the alternative for summary judgment. The district court granted all motions in Defendants' favor.

In their motion to dismiss, the Unisys Defendants argued that the Complaint failed to state a plausible claim for relief under Ashcroft v. Iqbal, 129 S. Ct. 1937 (2009), and Bell Atl. Corp. v. Twombly, 550 U.S. 544, 555 (2007), for purportedly forcing participants to pay excessive fees by offering retail mutual funds in the Plan. Relying in part on the Seventh Circuit's decision in Hecker v. Deere & Co., 556 F.3d 575, 586 (7th Cir. 2009), the district court concluded that because the Plan "offered a sufficient mix of investments," no rational trier of fact could find that the Unisys Defendants breached their fiduciary duties. Agreeing with the Seventh Circuit's opinion in Hecker, the court held that, because Unisys negotiated a trust agreement that provided Plan participants with investment options that were not unreasonable on their face, the complaint failed to state a plausible claim that the Unisys Defendants breached their fiduciary duties under ERISA. In so ruling, the court determined, like Hecker, that prudence did not require a plan fiduciary to select the cheapest fund available. The court noted that by offering more than 70 funds, the Plan provided participants with "a number of investment options with varying fees, risks and potential rewards," and that the fees charged by the funds in the plan were "disclosed to investors who could choose from among the investment options to create a portfolio tailored to meet their investment objectives."

As in Hecker, the court found that, because the funds offered in the Plan were also offered to investors in the general public, "the expense ratios necessarily were set against the backdrop of market competition." The court observed that "plan sponsors, when negotiating with potential trustees, would seek out the best deal possible for plan participants and would negotiate lower investment fees or administrative fees based on their market power if possible" and that "labor market forces are better positioned than courts to determine if plan sponsors can use the size of their plan as a bargaining chip to elicit lower prices or better services for plan participants." The court inferred from these circumstances that the Plan's fee agreement "was an arm's-length bargain and therefore needs less judicial oversight to ensure fairness to plan participants and beneficiaries."

The district court also granted the Unisys Defendants' alternative motion for summary judgment, which contended that any losses allegedly suffered by Plaintiffs were the result of their individual investment decisions and that ERISA Section 404(c) shielded Defendants from any liability. The court held that the Unisys Defendants met their burden of demonstrating compliance with Section 404(c), in that the plan provided participants and beneficiaries (1) an opportunity to exercise control over the assets in their individual accounts, and (2) an opportunity to choose from a broad range of investment alternatives. Relying on the Third Circuit's decision in In re Unisys Savings Plan, 74 F.3d 420, 445 (3d Cir. 1996), the court rejected Plaintiffs' contention that Section 404(c) does not insulate fiduciaries from liability in connection with the selection and monitoring of investment options. Plaintiffs argued that Unisys Savings Plan is no longer good law because that case dealt with conduct that predated the effective date of the DOL's Section 404(c) regulations and that the court should defer to the agency's interpretation of the statute pursuant to Chevron U.S.A., Inc. v. Natural Res. Def. Council, Inc., 467 U.S. 837, 842-43 (1984). The court rejected this argument, holding that the DOL's regulations are not entitled to Chevron deference because the Third Circuit's decision in Unisys Savings Plan was based on the "plain language" of the statute. The court in Unisys Savings Plan stated that ERISA's "unqualified instruction that a fiduciary is excused from liability for 'any loss' which 'results from [a] participant's or [a] beneficiary's exercise of control' clearly indicates that a fiduciary may call upon section [404(c)'s] protection where a causal nexus between a participant's or a beneficiary's exercise of control and the claimed loss is...

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