Participants are putting increased pressure on plan sponsors to ensure they are meeting their fiduciary responsibilities. Numerous lawsuits are targeting 401(k) plan sponsors and their ability to manage the investments, fees and are following proper due diligence. With this in mind, there is good news from a recent court case of Kanawi v. Bechtel in California in which procedural prudence was key factor courts focused on over fees and performance.

 

On November 3, 2008, a federal court in California dismissed the most significant 401(k) fee claims against Bechtel Corporation and its plan fiduciaries, based largely on the defendants' ability to show that they engaged in a prudent process of evaluating investment fund alternatives. (Kanawi v. Bechtel, No. C 06-05566 CRB (N.D. Cal. 11/3/08)) The remaining part of the lawsuit was settled December 1. This victory should provide enormous comfort to fiduciaries and plan sponsors who are able to demonstrate procedural prudence -- even if the fees charged by their fund options exceed those of available alternatives.

 

The court also rejected the plaintiffs' prohibited transaction claims. These claims were based on the payment of fees to an investment advisor formerly affiliated with Bechtel, because with the exception of a four-month period from late 2003 to early 2004, those fees were paid with corporate assets. Without an expenditure of plan assets, ERISA's prohibited transaction rules simply didn't apply.

 

In rejecting the additional claim that the defendants acted imprudently by paying excessive fees, the court focused intently on the record of procedural prudence that defendants were able to produce during discovery. "The record shows that the fiduciaries met regularly to discuss the Plan's investments and sought the advice of consultants to ensure that they were making proper decisions." Bechtel's record of a prudent process carried the day even though there was evidence that some of the funds offered under-performed their benchmarks. According to the court, "the test of prudence is one of conduct and not performance, [and] Plaintiffs have not demonstrated that the Defendants' conduct fell outside of their obligations to the Plan participants. It is easy to opine in retrospect that the Plan's managers should have made different decisions, but such 20/20 hindsight musings are not sufficient to maintain a cause of action alleging a breach of fiduciary duty."

 

The court essentially ruled it doesn't matter if fees were high, as long as the fiduciaries engaged in a prudent process when choosing the underlying investment funds. The decision provides helpful guidelines for employers attempting to establish a procedural prudence defense. In determining the Bechtel defendants had engaged in such a process, the court noted the plan's fiduciaries:

Of at least equal importance to the defendants' victory, however, was their ability to document the important components of their process. It is unlikely that smaller employers engage in the same kind of thorough, prudent process. Such employers should take notes from the Bechtel decision.

We invite additional questions about these features and how they relate to your 401(k) plan. Please contact Andrew Sweeny Jr. or Scott Thole at 513.745.0707.