In George v. Kraft Foods, the plaintiffs’ sole remaining claim is that Kraft Foods defendants breached their fiduciary duty by retaining two actively managed funds, the Growth Equity Fund and Balanced Fund, in their defined contribution plan following their decision to eliminate all actively managed investments in their defined benefit plans in 1999.
Following the Spano v. Boeing ruling in which the 7th U.S. Circuit Court of Appeals found that class certification is possible for ERISA 502(a)(2) claims, although complex if the underlying plan is a DC plan (see “Court OKs Class Actions for ERISA Cases“), the Kraft participants amended their motion to name only one class representative invested in both funds; to only include participants who invested in either fund; to define specific start and end dates to limit number of class members, not every past, present, and future participant as in the Spano case; and to limit class members to those whose investments in the funds underperformed compared to “prudent alternatives” – the Vanguard Mid Cap Index Fund and the Vanguard Balanced Index Fund.
U.S. District Judge Ruben Castillo of the U.S. District Court for the Northern District of Illinois agreed that the class is “better –defined and more-targeted,” but also agreed with defendants that plaintiffs’ choice of the Vanguard funds as comparators builds into the class definition “assumptions about the complicated and unsettled issues of loss and causation.” The issue of whether the underperformance of the class members’ investments in comparison to the Vanguard funds is the proper measure of loss in the case is “far from resolved,” Castillo wrote in his opinion. Defendants’ expert argued that the proper comparator funds are either the next closest investments already in the plan or other funds in the plan in proportion to participants’ previous investments. “Plaintiffs cannot use class certification as a backdoor way of resolving this contested issue in their favor,” Castillo said, adding that they must “affirmatively demonstrate” that the proposed class definition is appropriate, and they have not established the proper measure of loss.”
Castillo found that the plaintiffs also cannot show causation, because even if the defendants breached their fiduciary duty, because participants were free to choose investments, the plaintiffs cannot show that the breach caused them harm.
In July, Castillo denied Kraft’s motion for summary judgment, concluding that a jury could find that “a reasonably prudent business person with the interests of all the beneficiaries at heart” would have banned actively managed funds from their 401(k) plan as they had done in the Kraft defined benefit plan because they had concluded that active funds did not consistently outperform index managers (see "Court Rebuffs Summary Judgment Request in Revenue-Sharing Suit"). The court said that, although there may be differences between defined benefit plans and defined contribution plans, it believed a jury could reasonably find that a prudent fiduciary would have offered similar index funds in the 401(k) plan based on the same fiduciaries’ decision to eliminate active managers in the Kraft defined benefit plan.