Why Your 401(k) Plan May Want to Retain an Investment Manager

The recent decision in Wanek v. Russell Investments demonstrates how retaining a 3(38) investment manager--selected through a well-documented process--may help limit an employer’s liability under its 401(k) plan.

Under Section 3(38) of the Employee Retirement Income Security Act (ERISA), an investment manager is generally a registered investment advisor that has the power to manage the assets of a plan and that has acknowledged in writing that it is a fiduciary. This contrasts with an investment advisor under Section 3(21) of ERISA who renders investment advice but does not manage the plan assets.

The Wanek case involved the Caesars Entertainment retirement plan and challenges to the prudence of investment options selected and managed under an arrangement with Russell Investments, the plan’s 3(38) investment manager. Participants alleged that Russell breached its fiduciary duties by replacing existing funds with underperforming proprietary Russell funds. They also claimed that the plan’s investment committee breached its fiduciary duties by selecting and retaining Russell.

The federal trial court dismissed the claims against the committee but allowed the claims against Russell to proceed to trial. The court concluded that the committee acted prudently in hiring Russell after a “rigorous process designed to vet and select the best investment manager for the Plan.” Specifically, the committee:

• Conducted a formal request for proposal (RFP), inviting leading candidates from across the country.
• Reviewed detailed responses and performed comparative evaluations.
• Conducted external due diligence and screened for conflicts of interest.
• Met with finalists in person, negotiated lower fees, and discussed the pros and cons of each finalist.

Based on this record, the court held that the committee satisfied its fiduciary obligations in selecting and retaining Russell and granted summary judgment in the committee’s favor. By contrast, the court found that genuine issues of material fact remained as to whether Russell, acting as a 3(38) investment manager, breached its fiduciary duties by favoring its proprietary funds. As a result, Russell is left defending against the claims.

Wanek reinforces several key points for plan fiduciaries:

• A disciplined, well‑documented process for hiring and monitoring a 3(38) investment manager can significantly reduce liability exposure for the committee, even if investment outcomes are later challenged.
• Delegating investment discretion to a 3(38) manager reallocates much of the risk associated with specific fund and share‑class decisions to the investment manager, while leaving the employer or fiduciary committee responsible for prudent selection and ongoing oversight of the investment manager.
• The use of proprietary funds by a 3(38) manager remains a litigation hot spot, and courts will closely scrutinize how conflicts of interest, performance, and fees are evaluated.

Employers that sponsor 401(k) and 403(b) plans may wish to review their current investment advisor or investment manager arrangements, RFP practices, and committee documentation in light of this decision. When retaining an investment manager, employers should carefully evaluate any additional fees, particularly when those costs are paid from plan assets. Conducting this review at least every three to five years is generally advisable.

Finally, it is important to note that Wanek is a new and novel decision in recognizing limits on employer liability. Other courts may take a different approach.

If you have questions about the decision or about investment manager arrangements for your plan, please contact one of the attorneys on Bradley Employee Benefits & Executive Compensation Team.