Seventh Circuit Requires 401(k) Plan Fiduciaries to Stand Trial Where They Did Not Seek An RFP For Plan Recordkeeping Services Every Three Years

On April 11, a divided panel of the Seventh Circuit set a so-called "excessive fee" case on track for trial, by reversing in part the district court's decision to grant summary judgment for defendants in George v. Kraft Foods Global, Inc., No. 10-1469 (7th Cir.). On May 26, the appeals court denied the defendants' request to revisit its decision. The opinion is available here.

The litigation was brought by participants of a 401(k) plan against the plan's sponsor and various individuals affiliated with the plan sponsor, as well as the relevant corporate committee that was responsible for overseeing the plan. The plan had between 37,000 and 55,000 participants and $2.7 billion and $5.4 billion in assets during the time of the challenged actions. After earlier having certified the case as a class action, the district court thereafter ended the case in its entirety by granting summary judgment to all defendants. An appeal followed. A panel of the Seventh Circuit reversed the decision, in part, thereby setting the case on track for trial, unless further appeals are allowed or the case is resolved by the parties.

After addressing a few procedural issues, the Seventh Circuit focused on three substantive questions. First, the court reversed summary judgment as to whether the defendants acted prudently in continuing the company stock fund as a unitized fund without any trading limit, even after a related plan sponsor switched its company stock fund from a unitized to real time traded fund. The plaintiffs argued that maintaining the fund under a unitized accounting structure caused $83.7 million in harm to participants over a seven-year period, through so-called "investment drag" and "transactional drag" – the alleged inability of fund participants to fully capture appreciation in the employer's stock where 5% of the fund was invested in a cash buffer, and the alleged deleterious effect on all fund participants where the fund as a whole incurred trading costs necessitated by effectuating trades directed by a few participants who actively traded. The court held that the defendants were not entitled to summary judgment because they introduced no evidence that they made a conscious decision to maintain the unitized stock fund structure after their former parent company switched their fund away from a unitized accounting method, and that there was no evidence that the difference between unitized and real time traded funds was merely trivial.

Second, and...

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