Recently, a district court judge ruled in favor of Kraft FoodsGlobal in a lawsuit brought against the company by former andcurrent participants in the company's 401(k) plan.

The suit alleged that Kraft failed to fulfill its fiduciary dutyby charging investors unreasonably high service fees, such as the$3.4 million paid to consultants at Hewitt Associates forrecord-keeping services in 2004.

The case (George v. Kraft Foods) is one of many against Kraftfor similar issues, and all the cases bring up many questions forplan sponsors and plan participants.

To help clear the air, we asked employee benefits lawyer JennyKiesewetter, co-founder of Kiesewetter Law, to answer some of ourmore pressing questions. In addition to her law practice,Kiesewetter also teaches employee benefits law at the University ofMemphis School of Law.

BenefitsPro: How significant is this case?

Jenny Kiesewetter: According to the Society ofProfessional Asset-Managers and Record Keepers (“SPARK”) and TheSPARK Institute, assets in 401(k) plans have just topped $3 trillion dollars, byreaching $3.075 trillion in 2010. With such high assetvalues, it's no wonder that 401(k) plans have become targetsof litigation in recent years. The Kraft Foods Global, Inc. case,which was filed as a class-action suit in October 2006, is just onecase. During 2000-2006, the Kraft 401(k) plan had approximately$2.7 - $5.4 billion in assets.

Although most litigation over the past several years has beentargeted at large company 401(k) plans, plan sponsors of all 401(k)plans should be following these court cases as they couldpotentially be targeted in future lawsuits as well. Thesignificance of the Kraft case bears down on not just plansponsors, but all plan fiduciaries, no matter how large or howsmall the plan.

Plan fiduciaries have several fiduciary obligations set forth inthe Employee Retirement Income Security Act of 1974, as amended(“ERISA”), such as acting solely in the interest of planparticipants and beneficiaries, carrying out all duties prudently,diversifying plan investments, complying with appropriately draftedplan documents, and paying only reasonable plan expenses.

However, with fiduciary obligation and responsibility comespotential fiduciary liability. The Kraft case explores thispotential liability, as the case is still in the courts, andfurther explores whether the Kraft 401(k) plan fiduciaries in factbreached their fiduciary duties under ERISA.

Plan fiduciaries need to take a serious look at the Kraft case,along with other fiduciary breach cases involving 401(k)s as a wayto analyze, examine and monitor their own fiduciary processes withrespect to their own plans. By being familiar with these cases,other plan fiduciaries could benefit by making any necessaryadjustments in order to limit their own potential liability withrespect to their own plans.

BP: What are the fiduciary concerns raised by thiscase?

JK: The Kraft case raises primarily twofiduciary concerns: (1) that the Kraft 401(k) planfiduciaries breached their fiduciary duties by failing to reduceexcessive plan expenses to service providers, and thus actedimprudently; and (2) that the plan fiduciaries breached theirfiduciary duties by failing to act with respect to issues involvingthe plan investment expenses and the returns on those investments,and thus acted unreasonably and imprudently.

BP: How is it possible to determinewhen fees are reasonable and when fees areunreasonable?

JK: As stated above, paying only reasonableplan expenses is one of the many fiduciary duties with which planfiduciaries must comply. However, the law does not set a certainbenchmark, or rule, with respect to plan expense amounts and ifsuch amounts fall into a “reasonable” category. It is just requiredthat such plan expenses be “reasonable.”

To determine whether plan expenses are reasonable, plan fiduciaries must takepreventative measures to limit any potential liability in this areaof ERISA fiduciary duty law. For example, plan fiduciaries shouldconstantly monitor their plan’s current fees and expenses todetermine if they are reasonable. To do this, the plan fiduciariesshould complete a thorough analysis of the plan’s expenses and feesso that they are aware of what fees are actually being charged andhow their plan’s fee structure compares to other service providersin the industry. Plan fiduciaries must engage in a prudent analysisof their plan fees and expenses and further, should carefullydocument this process as well as repeat this process on a regularbasis.

Effective Jan. 1, 2012, new disclosures from service providers to plan sponsors will berequired. These disclosures must be in writing and must disclosespecific information to the plan sponsors about the serviceproviders’ services and fees. These mandatory disclosures will helpplan sponsors, and other plan fiduciaries, better monitor theirplan expenses and fees, and further help such plan fiduciariesdetermine whether such expenses and fees are “reasonable.”

BP: This isn’t the first such lawsuit; similar suitshave come up in the past, including the 2006 case involving Deereand Fidelity. What can plan sponsors do if they suspect they arebeing charged unreasonable fees?

JK: If plan sponsors believe they're beingcharged excessive plan fees and/or expenses, they should first talkto their service providers about why the fees are higher ascompared to others in the industry. At that point, the plan sponsorshould try to renegotiate such fees with the current serviceprovider or make the decision to interview new service providersthat could provide an equal service for the plan at a lowercost.

Keep in mind, however, that this entire process needs to becarefully documented to preserve any defense against potentialliability with respect to prudence.

Further, it would be wise for a plan fiduciary to take note ofany participant complaints as to fees and to follow up on suchcomplaints if necessary. Full disclosure of plan fees and expensesto participants will greatly help reduce confusion and possiblycomplaints, as the participants will more thoroughly understand howplan expenses and fees affect the 401(k) plan.

In fact, effective for plan years commencing after Oct. 31,2011, plan sponsors will be required to provide certain disclosures to plan participants with respect to planand investment information. These regulations create a newobligation for plan fiduciaries with respect to the fiduciaryduties of prudence and loyalty (i.e., acting solely in the interestof plan participants). This new fiduciary obligation is a mandatoryobligation and focuses on making plan fees more transparent. Thesemandatory disclosures should help participants, and planfiduciaries, better understand and monitor plan fees and expenseswith respect to their plans.

Further, the Department of Labor has issued proposed regulationsunder ERISA that expand the definition of “fiduciary," a definitionthat hasn't been altered in more than three decades.The expansion of the fiduciary role is targeted at exposing hiddenplan fees and inflated plan asset values.

BP: What should plan sponsors take away, ultimately,from this lawsuit?

JK: From the Kraft suit, plan sponsors shouldtake away the following:

1. Carefully document your fiduciary process, including detailedminutes. Careful documentation can help plan fiduciaries prove thatthey acted reasonably and prudently during all fiduciaryprocesses.
2. Ensure that all plan documents are appropriately drafted andupdated for all pertinent legislation. Ensure compliance with suchdocuments.
3. Examine your current plan expenses (including investment fees)and your current service providers. Compare the fees and servicesto others in the industry to make sure your plan fees are“reasonable.” Make sure that you document your examinationand analysis and further document any changes to your serviceproviders or plan fees. Make sure that your service providersdeliver the appropriate disclosures to you come Jan. 1, 2012, sothat you can better understand, monitor and control your planfees.
4. Hire a service provider to handle the plan’s certain fiduciaryfunctions. However, although a service provider may take some ofthe fiduciary responsibility off of the plan sponsor, the plansponsor must still monitor the service providers to make sure theyare acting prudently.
5. Make your required disclosures to the plan participantsaccording to the new regulations effective for plan years beginningafter Oct. 31, 2011. Make sure that all additional disclosuresunder ERISA are made as well.
6. Establish an ERISA Section 404(c) compliant plan, which wouldprovide a plan sponsor and other plan fiduciaries with protectionagainst liability with respect to participant selection ofinvestment options and any losses incurred by participants whoexercise control over their investments, if the plan complies withall of the Section 404(c) requirements. Please note, however, thatSection 404(c) compliance does not protect against all fiduciaryobligations.