Case Addresses Employer Responsibility for Retirement Plan Investment Options

UNISYS 404(c) Defense is Rejected

UNISYS was sued by participants in their 401(k) plan when accounts funded through GICs purchased from Executive Life were frozen in 1991. Initially a federal district court dismissed these claims on the basis that UNISYS had advised participants that the company did not guarantee repayment of principal or interest on their investments, accepting the UNISYS defense of participant direction under ERISA Section 404(c).

In a disturbing reversal, the third court did not accept the 404(c) defense. The court ruled that UNISYS did not include information for participants about the financial consequences of these investments and the restrictions placed on transfer of assets between funds were not consistent with the concept of individual control. The court also reinstated claims on the basis that one might conclude that the company failed to properly analyze the advisors recommendation of the Executive Life contracts and that the company did not use prudent standards in researching and selecting the contracts they purchased from Executive Life.

The developments in this case so far will be disturbing to many plan sponsors. GICs are much less prevalent in 401(k) plans now then in the 80's, but the general concept of holding the employer responsible for investment return can affect all plan sponsors. The responsibility for investment return is indirect in that the employer is held responsible for properly and prudently selecting investment options and making sure employees have sufficient information to choose between the options available..

An additional complication is that during the 70's and 80's most plan participants did not understand the general concept of guaranteed investment contracts. The term "guarantee" in "guaranteed investment contracts" is an insurance company marketing term and not a term that should have been used by plan sponsors in communicating with employees.

If you have questions or comments, please contact us at Dean & Company.