Recent 7th Circuit Decision for Defined Contribution Plan Fiduciaries to Watch

The U.S. Seventh Circuit Court of Appeals issued its opinion in George v. Kraft Foods Global Inc.earlier this week impacting fiduciaries to defined contribution retirement plans such as 401(k) plans and other defined contribution plans (see 70 PBD, 4/12/11).

The plaintiffs had challenged the fiduciaries' decisions on three issue: (1) the use of unitized accounting (a type of accounting where the participants have units in an investment fund instead of shares like shares purchased on an stock exchange), (2) the continued renewal of a recordkeeper's contract without obtaining competitive bids for fees, and (3) a  directed trustee's practice of retaining the float (that is keeping the interest earned on the funds set aside for a distribution check between the time the check is cut until it is actually cashed). Each of the issues is summarized below along with what the court decided.

Unitized Accounting of Company Stock Fund

The plan in the litigation had two company stock funds, one changed from unitized accounting to use share accounting and the other remained unitized. The plaintiffs argued that the fiduciaries breached their duties by failing to reach a decision about the proposed solutions to the investment drag and the transactional drag in the company stock fund. (The investment drag is the decrease in the return from maintaining some portion of the company stock fund in cash to be able to quickly process distributions and the fact that the cash had a lower return than the company stock. The transactional drag is the fact that the use of unitized accounting for the company stock fund meant that participants had units in their accounts and not shares and when they sold their company stock investment or received a distribution, the company could net those sales against other transactions to limit the number of share sales and to reduce the commissions, but this then led to participants engaging in more frequent trading and more expenses because the participants engaging in the frequent trading did not bear the full cost of their transactions, thus their frequent trading expenses were shifted to the other participant in the fund and those expenses reduced the overall return of the fund.)

The court found that there was no evidence that the fiduciaries made a decision with respect to the proposed solutions to investment drag and transactional drag in the company stock funds and that issue had to be returned for further proceedings to determine if whether the circumstances prevailing in 2004 would have caused a prudent fiduciary to make a decision on proposed solutions to investment drag in the unitized fund. If that is established, then the fiduciaries would have breached the prudent man standard of care by not making a decision on the proposed solutions to investment and transactional drag.

While the court did not say that unitized funds are bad per se, it did make it clear that when an issue about the accounting for an investment option is presented to a plan fiduciary with proposed solutions, it must document its consideration of such proposed solutions and why it makes the decision it has made.

Recordkeeping Fees

The plaintiffs also alleged that the plan fiduciaries acted imprudently in retaining the recordkeeper (from 1995 through 2004) that was paid out of the plan assets. The contract with the recordkeeper was extended a number of times without obtaining competitive bids. Instead of obtaining competitive bids, the plan had obtained the advice of consultants that the fees were reasonable. However, the opinion is a bit unclear in terms of what someone should do now, the court indicates that plan prudently relied on the opinion of advisors that the fees were reasonable, but then goes on to indicate that the consultants’ advice was not unequivocally endorsing the current recordkeeper's fees as reasonable because the advice was caveated with statements such as "without an actual fee quote comparison" and "could not comment on the competitiveness of [ 's ] fees" and thus the court reversed the grant of summary judgment for the defendants and sent the case back for trial on whether the fiduciaries were prudent in retaining the recordkeeper and whether the fees were excessive.

It is not clear if the consultant's advice will be sufficient when this case goes to trial, or if it is necessary for plan's fiduciaries to periodically go test the market and solicit competitive bids. How this case is decided on remand will be important to watch, if it is not settled. Documentation of the decision process remains critical.

This case does not state that one must go out for a competitive bid process at any particular time or at all, at least not at this point. A potential competitive bid process may be a good process to undertake periodically to see what new services may be available and to see how the service provider market is evolving and what opportunities may exist, but those are also not an inexpensive process. It will be worth waiting to see how other courts approach this issue.


The court did not find a problem with the plan's directed trustee retaining the float on checks cut for benefits until they were cashed because they could find no evidence that the plan's fiduciary's did not know how much float the trustee was retaining.

While everyone is acutely aware of the rapidly approaching deadline for compliance with the fee disclosures under the ERISA section 408(b)(2) regulations, it is important to remember the float disclosure as one part of it.

Greta E. Cowart
Haynes and Boone, LLP