Groups Urge Court to Review Kraft Ruling

The court found that Kraft Foods may have breached their fiduciary duties by, among other things, failing to make a decision about the unitized structure of the 401(k) plan’s stock fund.

In a friend of the court brief, ERIC, The Profit Sharing/401k Council, the American Benefits Council, and the U.S. Chamber of Commerce, argue that the 7^th U.S. Circuit Court of Appeals unitization and recordkeeping fee rulings conflict with decisions of the Supreme Court and the 7^th Circuit, and subvert basic objectives of the fiduciary duty provisions under the Employee Retirement Income Security Act (ERISA).    

“Instead of applying these provisions in a way that gives fiduciaries the discretion that Congress intended, the rulings subject fiduciaries to costly ‘make-work’ requirements and the threat of litigation that Congress sought to avoid,” the brief argues.  The brief also contends that the rulings’ potential impact is widespread: most employer stock funds are unitized funds, and both rulings threaten to complicate the management of funded employee-benefit plans of all kinds.   

The groups argue that the panel’s ruling attaches unwarranted significance to the absence of specific evidence that the defendants decided to continue to maintain unitized funds.  ERISA requires fiduciaries to follow lawful plan terms and requires participants to be informed of material changes in the plan.  “ERISA does not require that a decision not to change the plan be put in writing or communicated to plan participants.  Thus, when a decision is made not to change the way a plan is administered, plan fiduciaries do not typically affirm the decision in writing,” the brief contends.  

As to recordkeeping fees, the brief says that the panel’s ruling conflicts with the 7^th Circuit’s decisions regarding the duty of prudence, arguing that the ruling is based on the view that if a prudent fiduciary would have solicited competitive bids, a fiduciary that does not solicit competitive bids is imprudent.  This conflicts with this Court’s ruling in Hecker v. Deere that the duty of prudence does not require a fiduciary to “scour the market” to find the lowest-cost service provider and with its ruling in DeBruyne v. Equitable Life Assurance Society that the duty of prudence does not require all fiduciaries to act the same way, the groups said.   

In this case, “. . . no expert’s opinion could support the view that the only prudent course of action was to solicit competitive bids or that . . . fees were unreasonable merely because some other recordkeepers charged less for smaller, less complex plans, which are less likely to be affected by business acquisitions and dispositions and the needs of a diverse workforce,” the brief argued.   

In a separate statement, ERIC President Mark Ugoretz said: “If the Seventh Circuit panel ruling is allowed to stand, you will continue to see an influx of litigation from participants merely second guessing their plan administrator’s discretionary authority.”   

In its prior ruling, the 7^th Circuit determined that it was unclear whether fiduciaries had made a formal decision to continue the fund as a unitized fund, in which participants hold “units” in the fund instead of shares, and sent the case back for the trial court to determine evidence of a formal decision.   

It also found that Kraft’s reliance on an expert opinion with regard to the reasonableness of fees, rather than relying on competitive bids, may not have been sufficient.  The panel therefore sent the issue back for trial on the question of whether retaining the record keeper was prudent (see "Appellate Court Sends Back Kraft Fee Case").