George v. Kraft Foods Global, Inc., 641 F.3d 786

Background

Kraft 401(k) plan is a large defined-contribution plan with CSFs and non-CSF funds; plan participants could direct contributions into mutual funds with Kraft/Altria stock exposure; unitized CSFs include a cash buffer used to meet withdrawals and reduce transaction costs; fees for Hewitt (recordkeeper) and State Street (trustee) were paid from plan assets; plaintiffs allege fiduciaries imprudently allowed excessive fees and underperformed due to investment/transactional drags; district court denied leave to amend and granted summary judgment, which is appealed in part.
Between 2000 and 2006 the plan had 37,000–55,000 participants and up to $5.4 billion in assets; two CSFs invested mainly in Kraft/Altria stock and included a cash buffer; unitization and cash buffer enable quick distributions and netting but create investment and transactional drag; plaintiffs quantify $83.7 million in drag between 2000–2007 using expert Miller.
Fiduciaries hired Hewitt and State Street; fees and float income paid from plan assets; plaintiffs challenge recordkeeping fees and float income as unreasonable;
Procedural posture: plaintiffs filed in 2006; venue transferred to Northern District of Illinois; class certification schedule set; plaintiffs sought leave to amend to add 21 new defendants and new claims on investment decisions; district court denied leave due to undue delay and prejudice to ongoing class certification.
Court granted summary judgment on some issues but reversed in part for further proceedings on others; majority reverses on some issues and remands; issues include whether fiduciaries failed to decide on drag-reducing measures (investment/transactional) and whether recordkeeping fees and reliance on consultants were prudent; discovery and evidence issues also addressed.

Issues

Issue	Plaintiff's Argument	Defendant's Argument	Held
Whether denial of leave to amend was an abuse of discretion	Plaintiffs wanted to add many new defendants and claims	District court weighed undue delay and prejudice	No; denial upheld due to prejudice and disruption to discovery/class work
Whether Dr. O’Neal’s testimony was relevant	O’Neal opinion supported excessive-fee theory	O’Neal’s opinion not tied to issues in case	Yes; O’Neal testimony excluded as irrelevant to asserted issues
Whether fiduciaries breached by not deciding on drag-reduction measures for CSFs	Defendants failed to decide between maintaining unitization and adopting drag-reducing solutions	Fiduciaries did not have to make a decision or prudence foresees no decision needed	Issue of material fact regarding whether decision was required; remand for further consideration
Whether failure to solicit bids for Hewitt was prudent	Competitive bidding should have occurred periodically	Consultants’ advice and existing processes satisfied prudence	Genuine issue of material fact; remand for trial on reasonableness of fees
Whether State Street float income review was adequate	Defendants failed to determine float income; total compensation may be excessive	Defendants had annual float reports and prudent review	Summary judgment affirmed on this issue

Key Cases Cited

DiFelice v. U.S. Airways, Inc., 497 F.3d 410 (4th Cir.2007) (demonstrable exercise of discretion required in some fiduciary decisions)
Armstrong v. LaSalle Bank Nat'l Ass'n, 446 F.3d 728 (7th Cir.2006) (demonstrable discretion required in valuing stock under prudence standard)
Keach v. U.S. Trust Co., 419 F.3d 626 (7th Cir.2005) (independent appraisal not a complete defense to imprudence)
Howard v. Shay, 100 F.3d 1484 (9th Cir.1996) (outside advice not a complete defense to imprudence)
Donovan v. Cunningham, 716 F.2d 1455 (5th Cir.1983) (outside advice does not automatically satisfy prudence)
Donovan v. Bierwirth, 680 F.2d 263 (2d Cir.1982) (outside advice not automatic whitewash of fiduciary duty)
Brock v. Robbins, 830 F.2d 640 (7th Cir.1987) (availability of injunctive relief for breach of duty of prudence)