On April 11, 2011, the Seventh Circuit Court of Appeals in Chicago issued a ruling that was a setback for employers fighting lawsuits claiming excessive 401(k) plan fees and other 401(k) plan mismanagement. Prior to this recent decision, almost all court decisions favored employers. In Gerald George, v. The Kraft Foods Global, Inc.,, the Court reversed parts of a lower court decision that granted summary judgment for Kraft and its retirement plan committee. In the lawsuit, the plaintiffs allege that the Kraft plan paid excessive fees to the plan recordkeeper and maintained excessive cash in the Kraft stock fund, which was an investment choice under the Kraft plan. The claim relating to the Kraft stock fund arose because the fund was a “unitized” stock fund containing Kraft stock and a small amount of cash to allow participants to move in and out of stock without the plan having to make daily purchases and sales in the market. The lower court also ruled that fees were reasonable based on the plan committee's reliance on a consultant who opined as to the reasonableness of the fees. The lower court also had dismissed the plaintiff’s claim with respect to the stock fund.

The Court’s Decision

The Seventh Court of Appeals reversed the lower court’s rulings with respect to the unitized stock fund and the reasonableness of the fees. On the fee issue, the Court ruled that summary judgment was not appropriate because it was not clear whether reliance on the consultant was sufficient to show that the plan committee acted appropriately. With the respect to the unitized stock fund issue, the appeals court also reversed the district court concluding that while the fiduciaries discussed moving away from a unitized stock fund to purchases of actual stock, there was no evidence of a decision to retain the unitized stock fund. Kraft was hurt in this case by the fact that a plan of a related employer, Altria, moved from a unitized stock fund to the direct purchase of stock and engaged in an RFP process to ensure that 401(k) plan administration fees were reasonable. The Court sent the case back to the lower court for further evidence with respect to whether the unitized stock fund was prudent and whether the fees were reasonable.

Q&B Key: In light of the Kraft decision, retirement plan committees should do the following:

  • Hold regular plan committee meetings, make decisions and keep minutes of those decisions. (The Kraft decision suggests that if committee minutes had reflected express approval of the unitized stock fund, that the lower court decision would have been affirmed).
  • Ensure that committee minutes reflect the factors that were considered in making the decision (It would have been helpful to the Kraft committee if it had been able to distinguish why it was not taking the same actions as Altria).
  • Regularly evaluate the relationship with your Plan Administrator on a periodic basis. Most committees regularly evaluate the mutual funds offered by their retirement plans, but do not regularly evaluate the overall administration relationship.
  • Ask your consultant and other advisors whether there were any administrative practices where the plan is in a minority relative to other plans of its size, and whether there are any other trends with respect to investment or administration issues that the committee should be aware of (For example, technological changes have facilitated the move away from unitized stock funds.)