CHICAGO (CN) - In a 2-1 split, the 7th Circuit voted to revive a class action by Kraft employees alleging that mismanagement of the company's 401(k) plan caused them to miss out on $83.7 million in investment gains between 2000 and 2007.
At its peak, Kraft's 401(k) plan included 55,000 participants and $5.4 billion in assets. Participants were able to direct their contributions into one or more of the nine mutual-fund options offered. Two of these, company-stock funds, became the subject of the suit.
The complaint, filed in 2006, claimed that plan managers had incurred "excessive expense and generate insufficient returns."
The plan's unitized structure invested most assets in stocks, but included a 5 percent cash buffer that was designed to allow quick cash transactions. Ultimately, however, it created "investment drag," preventing the fund from reaching its full potential when stocks went up.
In addition, the plan's policy of deducting stock transaction costs from the overall value of the fund, rather than allocating them to the individual who initiated the transactions, decreased margins by encouraging participants to trade with little discretion. This "transactional drag" allegedly cost an average of $145 per participant per year.
An Illinois federal judge certified the class but granted summary judgment for the defendants.
The 7th Circuit reversed, finding that managers failed to act on plaintiffs' proposed changes to the plan. Since there was a genuine issue of material fact as to the prudence of the decision, the court's majority felt summary judgment was a misstep.
"Given the state of the record, we think the best course is to reverse the district court's grant of summary judgment ... and remand for further consideration," U.S. District Judge Lynn Adelman wrote for the majority. Adelman sat on the panel by designation from the Milwaukee-based Eastern District of Wisconsin.
To succeed in their suit, plaintiffs must still demonstrate that indecisiveness caused loss.
"This might be difficult to do, in that it is impossible to know what would have happened had the fiduciaries made a decision," Adelman wrote.
Judge Richard Cudahy dissented. "What the trustees did here is well within their discretion, both from an administrative and an investment standpoint, and should not become the subject of a federal lawsuit," he wrote.
Cash buffers, which Cudahy said are included in 90 percent of 401(k) plans, are a legitimate means of preserving investment. He also called the sharing of trading costs among all participants "perfectly appropriat[e]."
"This is an implausible class action based on nitpicking with respect to perfectly legitimate practices of the fiduciaries. I would therefore affirm the excellent district court opinion throughout, including summary judgment matters the majority chooses to reverse," Cudahy wrote.
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