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5500 Preparer's Manual for 2012 Plan Years
The premier resource in the field of Form 5500 preparation, 5500 Preparer's Manual will help you handle the required annual Form 5500 filings for both pension benefits and welfare benefit plans.
In a potentially significant fee litigation case, a federal trial court in California has ruled in Kanawi v. Bechtel Corp. that plan sponsors and other plan fiduciaries were not subject to liability under ERISA for paying allegedly excessive fees to a mutual fund or maintaining underperforming investment options where they were able to document that their decisions were the function of procedural prudence. The court also held that the payment by the plan sponsor of fees to an investment advisor affiliated with the sponsor did not constitute a prohibited transaction because the fees were not paid from plan assets.
Investment advisor affiliated with sponsor
The employer maintained a 401(k) plan, the authority for the administration of which it delegated to a committee, primarily comprised of senior officers and executives. The committee contracted with the Investment Advisors (IA) to provide investment and administrative services to the plan. Pursuant to this agreement, IA, which was formed from an in-house investment and management division of the employer and was owned by the employer, had the full authority to purchase, sell, or exchange assets of the plan. The primary client of IA was the employer.
As plan sponsor, the employer paid all fees assessed by IA from 1993 until November 2003, and during the February 2004-July 2004 period. During the four month period from November 2003-February 2004, the fees were paid from plan assets. Plan participants brought suit under ERISA in September 2006, alleging that the employer, the committee administering the plan, and IA breached their fiduciary duties by causing plan participants to incur unnecessary and improper fees in connection with the plan. The participants also charged that the parties engaged in self-dealing, imprudently selected investment options, and concealed the true nature of the fees and expenses incurred by the plan.
Payment of excessive fees
Possibly the most significant aspect of the opinion involved the disposition of the charge that the employer, plan committee, and IA paid excessive fees incident to investing in certain mutual funds connected with the employer. The court, noting that the transactions occurred outside the relevant time period, focused less on the potential prohibited transaction issues, and more on whether the fiduciaries breached the duty of loyalty by maintaining the funds as investment options and paying the mutual fund management fees.
In determining whether the payment of fees was prudent and in the best interests of plan participants, the court stressed that the determinative factor was whether the process used in reaching a decision was prudent. In concluding that the participants had not demonstrated that the payment of the fees was imprudent, the court explained that the evidence in record did not support the determination that the fees paid by the plan were patently unreasonable or that the fiduciaries abrogated their duties in reviewing the plan’s performance.
Of special significance to the court (and thus, of note for plan sponsors and other fiduciaries litigating fee disputes) was the fact the committee met regularly to discuss the plan’s investments and relied on the advice of outside consultants to ensure that it was making the proper decisions. In light of such documented procedural prudence, the court ruled that the fiduciaries acted appropriately and within their sound business judgment in maintaining the funds and, by extension, paying the allegedly excessive fees.
In addition, the court dismissed the claim that the fiduciaries violated their duties under ERISA by maintaining imprudent investment options. The plan’s structure was customary for the type of plan being maintained; the fiduciaries regularly reviewed the performance of the investment options and considered alternatives; and the overall performance of the funds was competitive with the industry standard. Although some of the funds may have underperformed, the test of prudence, the court emphasized, is one conduct and not performance.
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