Procedural Prudence Saves the Day for Bechtel Fee Defendants

Posted: Monday, November 10, 2008

By: Gregory L. Ash

Topic: Fees

A federal court in California kicked the most significant 401(k) fee claims against Bechtel Corporation and its plan fiduciaries out of court on November 3, 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 court granted in substantial part the defendants' motions for summary judgment, leaving only limited claims for the plaintiffs to pursue at trial.  This victory should provide enormous comfort to fiduciaries and plan sponsors who are able to demonstrate procedural prudence -- even if the actual fees assessed by their fund options exceed those of alternatives.

This is one of the first excessive fee cases filed by the St. Louis-based Schlicter, Bogard & Denton law firm.  It has been proceeding on a fast track in recent months, as the parties work towards a December 2008 trial date.  Whether that trial will proceed now in light of the court's November 3 ruling is yet to be determined.

Ruling on cross motions for summary judgment by all parties, the court concluded first that the plaintiffs -- a class of participants in Bechtel's 401(k) plan -- could only pursue claims that arose after September 11, 2000, in light of ERISA's six-year statute of limitations.   The court also rejected the plaintiffs' prohibited transaction claims which were based on the payment of fees to an investment advisor that had formerly been 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.  In the absence of 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."  This 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 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."

Although this decision did not dispose of the case in its entirety, and although the court rejected the defendants' reliance on Section 404(c) of ERISA as a total bar to the plaintiffs' claims (accepting instead the Department of Labor's view that selecting the fund lineup is a fiduciary act that is not shielded by 404(c)), it is an extremely significant victory for plan sponsors.  First, this is one of the first judicial decisions to address the substance of the claims in these suits -- that is, that plan fees were excessive.  The court essentially ruled that it doesn't matter if fees were high, as long as the fiduciaries engaged in a prudent process when choosing the underlying investment funds.

Second, this decision came out of a judicial circuit (the 9th) that is typically more amenable to claims by plan participants than others.

Third, the decision provides helpful guideposts for employers who are attempting to establish a procedural prudence defense.  In determining that the Bechtel defendants had engaged in such a process, the court noted that the plan's fiduciaries:

• Met regularly to discuss the plan's investments;
• Relied on the advice of disinterested outside consultants;
• Employed a benefit structure that was "customary for this type of defined contribution plan";
• Regularly reviewed the funds' performance and considered alternatives; and
• Offered a menu of fund options that, as a whole, "was competitive with the industry standard."

Of at least equal importance to the defendants' victory, however, was their ability to document the important components of their process.

In the end, it is likely that most of the large employers targeted in this phase of the excessive fee lawsuits will be able to demonstrate a prudent process.  Thus, this set of targets may have presented the most difficult case for the plaintiffs to prove.  It is unlikely that smaller employers engage in the same kind of thorough, prudent process.  Such employers should take notes from the Bechtel decision.