In-house counsel who regularly deal with employee benefit plans are aware of the myriad responsibilities that accompany these programs under the Employee Retirement Income Security Act (ERISA) and the tax code. Increasingly, plaintiffs’ lawyers and regulators are paying close attention to the fees paid by plans and plan participants for the services required to provide these benefits. These fees include the cost of plan recordkeeping and investment expenses.
Recently, the 7th Circuit added a new dimension to the litigation involving fee challenges to 401(k) and other retirement plans. In George v. Kraft Foods Global, Inc., the court ruled that the employer sponsoring a 401(k) plan and the employees who had responsibility for the management of the plan would be required to stand trial because, in part, they did not initiate a request for proposal (RFP) for plan recordkeeping services every three years, as one supposed expert suggested was a prudent practice.
The case raises a host of questions about what is required of employers and those within a corporation who are responsible for the management of employee retirement plans. It is often said that the fiduciary obligations imposed by ERISA are the highest-known to the law. But the question remains, what is necessary to satisfy those standards? As the dissenting judge in Kraft aptly explained, “[i]t is hard to determine exactly what the majority’s holding means for ERISA fiduciaries ... [W]hat is adequate to support a fee without fear of litigation?”
A recent study of plan sponsors that was conducted roughly contemporaneously with the George decision showed that only approximately one-quarter of respondents actually engaged in an RFP for retirement plan services. This suggests that, should other courts follow the George approach, the remaining three-quarters of survey respondents would have exposure for not conducting such an RFP.
The ERISA “prudent person” standard of care requires a plan fiduciary to perform his or her plan-related duties “with the care, skill, prudence, and diligence under the circumstances then prevailing that a prudent man acting in a like capacity and familiar with such matters would use in the conduct of an enterprise of a like character and with the like aims.”
Courts have determined that this prudence requirement contains two components: procedural prudence and substantive prudence. Procedural prudence looks to whether fiduciaries employed a prudent process in reaching their decision. If the process employed by a fiduciary is prudent, then the fiduciary has a complete defense to a claim of imprudence. The George decision focuses on this component. Defendants may attempt to establish at trial that the prevailing standard does not include conducting triennial RFPs.
Conversely, substantive (or objective) prudence looks to whether the outcome was itself appropriate, regardless of what process was employed in reaching that result. As then-Judge Scalia explained more than 25 years ago: “I know of no case in which a trustee who has happened—through prayer, astrology or just blind luck—to make (or hold) objectively prudent investments (e.g., an investment in a highly regarded ‘blue chip’ stock) has been held liable for losses from those investments because of his failure to investigate and evaluate beforehand.” Thus, courts hold that even where the process employed was lacking or nonexistent, a substantively prudent outcome affords a complete defense to a claim of imprudence.
The standards in this area are continually evolving. New regulations being promulgated by the Department of Labor require additional fee disclosure by plan fiduciaries and the providers of services to such plans. Procedural and substantive prudence requirements may continue to evolve. Practices and outcomes that were the norm 10 or 20 years ago may be outdated today.
With an increased focus on plan fees, and the decisions by courts such as George as to what is required by employers in discharging their obligations, in-house counsel should continue to be vigilant in regard to the discharge of corporate obligations in this evolving area of the law.