Plan fiduciaries generally understand that they have certain duties related to plan investments and service provider fees. Court decisions over the years have shed some light on these duties. Fiduciaries should already be doing the following to satisfy their fiduciary duties:

  1. Obtain some measure of expertise in plan investments. Lacking expertise, a fiduciary should hire someone with the professional knowledge required to carry out the investment functions.
  2. When selecting service providers, engage in a reasoned decision-making process and document the basis for decisions. The duty to act prudently focuses primarily on the decision-making process.
  3. Pay only reasonable plan expenses for plan-related services. This requires periodic reviews to ensure that existing service providers are not charging excessive fees.

The Seventh Circuit’s ruling in Gerald George v. Kraft Foods Global, Inc. reminds fiduciaries that they need to exercise continued diligence and prudence when investing in company stock and when selecting service providers. A group of 401(k) plan participants alleged that plan fiduciaries violated their fiduciary duties by (1) mismanaging company stock funds, (2) paying excessive recordkeeping fees, and (3) paying excessive trustee fees. The Kraft decision teaches us three valuable new lessons:

  1. When an issue arises, thoroughly analyze the issue and document resolution, including a decision to do nothing. The Kraft 401(k) plan had two company stock funds that invested primarily in the common stock of Kraft and Kraft’s parent company. These funds were operated on a unitized basis. The plaintiffs alleged that the unitized structure caused the company stock funds to underperform direct investment in the stock by $83.7 million between 2000 and 2007. At one point, the fiduciaries of Kraft’s plan and the parent company’s plan discussed this issue, and eventually the parent company’s 401(k) plan switched to “real-time trading,” which was essentially the opposite of unitization. Kraft did not make this change, and there was no record of a decision on this issue (i.e., Kraft did not have any rationale for remaining with unitization). The Court found there was a genuine issue of material fact as to whether Kraft breached the prudent man standard of care by failing to make a reasoned decision under circumstances in which a prudent fiduciary would have done so.

The primary takeaway is that when an issue arises, fiduciaries should thoroughly document their review and decision-making process. Further, plans that are using unitization may need to review this practice to consider whether this is the best practice for their circumstances.

  1. Solicit competitive bids for recordkeeping services on a periodic basis and/or document other analysis regarding maintaining the current relationship. The plaintiffs alleged that prudent fiduciaries would have solicited competitive bids for recordkeeping services on a periodic basis—about once every three years. Kraft hired Hewitt as its recordkeeper in 1995. From 1995 forward, Kraft never solicited another competitive bid from other recordkeepers. ERISA and the underlying regulations do allow a plan to be written to provide that “reasonable” administrative expenses will be paid from plan assets, but do not set forth a requirement that fiduciaries solicit bids (much less on a particular schedule). The Court did find that a trier of fact could reasonably conclude that the fiduciaries did not satisfy their duty to ensure that Hewitt’s fees were reasonable, and remanded the matter for further consideration.

The request for proposal (“RFP”) process can be time consuming and expensive, cheaper is not always better, and an RFP is not the only method for obtaining pertinent information and making decisions. Further, changing investment providers is disruptive, time consuming, and may be expensive. Nonetheless, this case suggests that fiduciaries should periodically consider whether it is in the best interests of the participants to remain with the current provider, and whether expenses are reasonable, and document this review. The Department of Labor has some materials on its website that may be helpful to a fiduciary who is selecting service providers.

  1. Know the sources and amounts of compensation being paid to providers. The Kraft plan paid its trustee a fee for its services and allowed the trustee to retain “float income” (i.e., income earned on plan funds from the time the checks are deposited to the time the checks clear). The plaintiffs argued that the plan fiduciaries failed to determine how much float income the trustee was earning. Without such knowledge, the plaintiffs argued that the fiduciaries could not satisfy their duty to ensure that the trustee’s compensation was reasonable. The plaintiffs could not prove that the fiduciaries failed to review reports regarding the float income, and could not point to any other steps that prudent fiduciaries would have taken to ensure the reasonableness of the trustee’s fees. Accordingly, the Court affirmed summary judgment in favor of the defendants on this issue.

401(k) plan fee disclosure has been a hot issue in recent years. Implementing new Department of Labor regulations regarding disclosures to fiduciaries and disclosures to participants may be a time consuming and painful process, but should limit this type of litigation going forward.