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Kraft Settles Claims of 401(K) Mismanagement

(CN) - Kraft will pay $9.5 million to settle claims that it mismanaged employees' retirement plans, causing accounts to plummet by more than $80 million in seven years.

In a 2006 complaint against Kraft Foods Global, employees claimed that the food conglomerate violated its fiduciary duties by including a 5 percent "cash buffer" in its company stock funds.

Though the cash buffer helped the fund maintain value when Kraft stock lost value, its "investment drag" effect kept cash values steady when stock went up, according to the complaint.

The employees said that the buffer caused Kraft's investment funds to underperform relative to direct investment. Ultimately, these and other factors allegedly caused members to lose $83.7 million in investment gains between 2000 and 2007.

The plan also deducted stock-transaction costs from the overall value of the fund, rather than allocating the costs to the individual, thus encouraging participants to trade without discretion, according to the complaint. This "transactional drag" allegedly cost an average of $145 per person per year.

Moreover, they said that Kraft actively concealed information regarding its decision to select and retain the underperforming funds, while paying excessive fees to the fund's bookkeepers at Hewitt Associates.

Between 1994 and 2010, the plan had between 28,000 and 55,000 participants, and between $1.5 and $5.4 billion in assets.

U.S. District Judge Ruben Castillo originally granted Kraft's motion for summary judgment, but the 7th Circuit reversed last year. A two-judge majority found no evidence that Kraft made a reasoned decision about the structure of the 401(k) funds.

"Despite all this discussion of investment and transactional drag, we can find nothing in the record indicating that defendants ever made a decision on these matters," the April 2011 opinion states.

"We know that the status quo from 2004 persists to this day, but the record does not tell us whether this persistence is the result of a deliberate decision to maintain the status quo or whether it was caused by the fiduciaries' decision to table the matter," the majority decision continues.

Kraft reached a settlement agreement with the employees last week. "After more than five years of litigation, to avoid the additional uncertainties and costs associated with continued litigation, the parties have reached a mutual resolution to this case," according to an order signed Wednesday by U.S. Magistrate Judge Nan Nolan.

The preliminarily approval stipulates that Kraft will establish a $9.5 million fund to distribute payments to class members and to pay attorneys' fees.

"Defendants have denied and continue to deny the claims and contentions of the class representatives, deny that they are liable at all to the class, and deny that the settlement class or the plan have suffered any harm or damage for which defendants could be held responsible," the order states.

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