BenefitsPro: How significant is this case?

Jenny Kiesewetter: According to the Society of Professional Asset-Managers and Record Keepers (“SPARK”) and The SPARK Institute, assets in 401(k) plans have just topped $3 trillion dollars, by reaching $3.075 trillion in 2010. With such high asset values, it's no wonder that 401(k) plans have become targets of litigation in recent years. The Kraft Foods Global, Inc. case, which was filed as a class-action suit in October 2006, is just one case. During 2000-2006, the Kraft 401(k) plan had approximately $2.7 - $5.4 billion in assets.

Although most litigation over the past several years has been targeted at large company 401(k) plans, plan sponsors of all 401(k) plans should be following these court cases as they could potentially be targeted in future lawsuits as well. The significance of the Kraft case bears down on not just plan sponsors, but all plan fiduciaries, no matter how large or how small the plan.

Plan fiduciaries have several fiduciary obligations set forth in the Employee Retirement Income Security Act of 1974, as amended (“ERISA”), such as acting solely in the interest of plan participants and beneficiaries, carrying out all duties prudently, diversifying plan investments, complying with appropriately drafted plan documents, and paying only reasonable plan expenses.

However, with fiduciary obligation and responsibility comes potential fiduciary liability. The Kraft case explores this potential liability, as the case is still in the courts, and further explores whether the Kraft 401(k) plan fiduciaries in fact breached their fiduciary duties under ERISA.

Plan fiduciaries need to take a serious look at the Kraft case, along with other fiduciary breach cases involving 401(k)s as a way to analyze, examine and monitor their own fiduciary processes with respect to their own plans. By being familiar with these cases, other plan fiduciaries could benefit by making any necessary adjustments in order to limit their own potential liability with respect to their own plans.

BP: What are the fiduciary concerns raised by this case?

JK: The Kraft case raises primarily two fiduciary concerns: (1) that the Kraft 401(k) plan fiduciaries breached their fiduciary duties by failing to reduce excessive plan expenses to service providers, and thus acted imprudently; and (2) that the plan fiduciaries breached their fiduciary duties by failing to act with respect to issues involving the plan investment expenses and the returns on those investments, and thus acted unreasonably and imprudently.

BP: How is it possible to determine when fees are reasonable and when fees are unreasonable?

JK: As stated above, paying only reasonable plan expenses is one of the many fiduciary duties with which plan fiduciaries must comply. However, the law does not set a certain benchmark, or rule, with respect to plan expense amounts and if such amounts fall into a “reasonable” category. It is just required that such plan expenses be “reasonable.”

To determine whether plan expenses are reasonable, plan fiduciaries must take preventative measures to limit any potential liability in this area of ERISA fiduciary duty law. For example, plan fiduciaries should constantly monitor their plan’s current fees and expenses to determine if they are reasonable. To do this, the plan fiduciaries should complete a thorough analysis of the plan’s expenses and fees so that they are aware of what fees are actually being charged and how their plan’s fee structure compares to other service providers in the industry. Plan fiduciaries must engage in a prudent analysis of their plan fees and expenses and further, should carefully document this process as well as repeat this process on a regular basis.

Effective Jan. 1, 2012, new disclosures from service providers to plan sponsors will be required. These disclosures must be in writing and must disclose specific information to the plan sponsors about the service providers’ services and fees. These mandatory disclosures will help plan sponsors, and other plan fiduciaries, better monitor their plan expenses and fees, and further help such plan fiduciaries determine whether such expenses and fees are “reasonable.”

BP: This isn’t the first such lawsuit; similar suits have come up in the past, including the 2006 case involving Deere and Fidelity. What can plan sponsors do if they suspect they are being charged unreasonable fees?

JK: If plan sponsors believe they're being charged excessive plan fees and/or expenses, they should first talk to their service providers about why the fees are higher as compared to others in the industry. At that point, the plan sponsor should try to renegotiate such fees with the current service provider or make the decision to interview new service providers that could provide an equal service for the plan at a lower cost.

Keep in mind, however, that this entire process needs to be carefully documented to preserve any defense against potential liability with respect to prudence.

Further, it would be wise for a plan fiduciary to take note of any participant complaints as to fees and to follow up on such complaints if necessary. Full disclosure of plan fees and expenses to participants will greatly help reduce confusion and possibly complaints, as the participants will more thoroughly understand how plan expenses and fees affect the 401(k) plan.

In fact, effective for plan years commencing after Oct. 31, 2011, plan sponsors will be required to provide certain disclosures to plan participants with respect to plan and investment information. These regulations create a new obligation for plan fiduciaries with respect to the fiduciary duties of prudence and loyalty (i.e., acting solely in the interest of plan participants). This new fiduciary obligation is a mandatory obligation and focuses on making plan fees more transparent. These mandatory disclosures should help participants, and plan fiduciaries, better understand and monitor plan fees and expenses with respect to their plans.

Further, the Department of Labor has issued proposed regulations under ERISA that expand the definition of “fiduciary," a definition that hasn't been altered in more than three decades. The expansion of the fiduciary role is targeted at exposing hidden plan fees and inflated plan asset values.

BP: What should plan sponsors take away, ultimately, from this lawsuit?

JK: From the Kraft suit, plan sponsors should take away the following:

1. Carefully document your fiduciary process, including detailed minutes. Careful documentation can help plan fiduciaries prove that they acted reasonably and prudently during all fiduciary processes.
2. Ensure that all plan documents are appropriately drafted and updated for all pertinent legislation. Ensure compliance with such documents.
3. Examine your current plan expenses (including investment fees) and your current service providers. Compare the fees and services to others in the industry to make sure your plan fees are “reasonable.” Make sure that you document your examination and analysis and further document any changes to your service providers or plan fees. Make sure that your service providers deliver the appropriate disclosures to you come Jan. 1, 2012, so that you can better understand, monitor and control your plan fees.
4. Hire a service provider to handle the plan’s certain fiduciary functions. However, although a service provider may take some of the fiduciary responsibility off of the plan sponsor, the plan sponsor must still monitor the service providers to make sure they are acting prudently.
5. Make your required disclosures to the plan participants according to the new regulations effective for plan years beginning after Oct. 31, 2011. Make sure that all additional disclosures under ERISA are made as well.
6. Establish an ERISA Section 404(c) compliant plan, which would provide a plan sponsor and other plan fiduciaries with protection against liability with respect to participant selection of investment options and any losses incurred by participants who exercise control over their investments, if the plan complies with all of the Section 404(c) requirements. Please note, however, that Section 404(c) compliance does not protect against all fiduciary obligations.