No ERISA Breach Where Fees not Paid by Plan

A 401(k) plan sponsor did not engage in a prohibited transaction under § 406 of the Employee Retirement Income Security Act (ERISA) because investment manager fees were not paid using assets of the plan, a court has ruled.

According to the opinion in the U.S. District Court for the Northern District of California, since fees for the plan’s investment manager were paid directly by the plan sponsor, there was neither a transaction with a “party in interest” that would be prohibited by ERISA § 406(a) nor a self-dealing transaction that would be prohibited by § 406(b). The opinion said that from inception through the date it was sold in 2006, Fremont Investment Advisors (FIA) was owned by what had been Bechtel Investments Inc., and during the relevant period, Stephen Bechtel Jr. owned a stake in FIA’s parent company.

The court also said “the evidence may suggest that Bechtel did not apprise the plan participants of the full extent of Bechtel’s interest in’ the investment manager, but the plaintiffs failed to produce evidence to support a finding that the plan fiduciaries took steps to conceal a breach of fiduciary duty or made knowing misrepresentations with the intent to defraud plan participants. The court also dismissed plaintiffs’ allegations the plan sponsor concealed excessive fees, misrepresented investment risk, failed to use proper benchmarks for some funds, and made misstatements about ERISA’s safe harbor defense.

The plan participants also claimed Bechtel violated its fiduciary duty by maintaining imprudent investment options, but the court defended Bechtel’s offering of six different investment options at various levels of risk, saying the offering was customary for this type of defined contribution plan. In addition, according to the opinion, the evidence shows that Bechtel and plan fiduciaries regularly reviewed the performance of the plan’s investments and considered alternatives.

The court did however, move forward the claims relating to a four-month time period during the six years related to the lawsuit where the investment fees were paid by plan assets.

The case is Kanawai v. Bechtel Corp., N.D. Cal., No. C 06-05566 CRB, 11/3/08.