Seventh Circuit Reverses Kraft SJ in 401(k) Fee Case

September 1, 2011

Authored by: benefitsbclp

Earlier this year, a split Seventh Circuit panel reversed, in part, summary judgment previously granted in favor of Kraft Foods Global, Inc. (“Kraft”) in a class action ERISA breach of fiduciary duty case involving “excessive fees” claims in connection with Kraft’s 401(k) plan. The majority opinion was authored by Judge Adelman, an Eastern District of Wisconsin judge sitting by designation in the Seventh Circuit, and was joined by Judge Rovner.

This entry provides a high-level summary of the issues reversed by the court:

  • The Company Stock Fund Issue:  In 2003, Kraft’s then-parent company, Altria Group, Inc. (formerly Philip Morris), made the decision to move the company stock fund in its 401(k) plan from the unitized stock fund (which generally employs a cash buffer) model to “real time” trading where each participant owned shares of the relevant stock rather than units of a fund that invested in the stock. Kraft plan fiduciaries considered similarly moving away from the unitized stock fund mode; however, at that time, Hewitt (the Kraft plan recordkeeper) did not offer real time trading. The court also noted that the unitized model offered advantages (e.g., faster trades and lower transaction costs by “netting” participant transactions).  Based on the Court’s review of the record, the Kraft plan fiduciaries considered, but never actually made a decision regarding, whether to retain the unitized fund or move to real time trading.  On remand, the Seventh Circuit majority ruled that Kraft must offer evidence that its plan fiduciaries made a decision to retain its unitized company stock fund (and that such decision was prudent).
  • The Recordkeeping Fee Issue:  From 1995 until present, the Kraft plan used Hewitt for the provision of recordkeeping services and had not put the recordkeeping contract out to bid. Over the course of time, the Hewitt contract was extended many times and, in so extending the contract, Kraft plan fiduciaries relied upon the advice of consultants that the fees it was paying to Hewitt were reasonable. The Seventh Circuit majority ruled that the plaintiffs’ proffered expert’s opinions as to (1) the level of reasonable fees, and (2) the requirement of plan fiduciaries to solicit competitive bids before extending the contract (which had been discredited by the district court as being of “limited relevance”) were relevant and admissible. The court continued that it was improper for the district court to weigh the evidence at the summary judgment stage; it must view the evidence in the light most favorable to the nonmovant party (i.e., the participants/plaintiffs). The majority further ruled that the Kraft plan fiduciaries were not necessarily prudent in relying on the advice of consultants in lieu of obtaining bids. On remand, the district court must resolve these issues.

The Seventh Circuit affirmed the lower court’s grant of summary judgment on the issue of the Kraft plan trustee’s retention of float income.

The third panelist, Judge Cudahy, issued a strong dissent as to the summary judgment items reversed by the majority. Judge Cudahy’s intense disagreement with the majority opinion is summarized in the first few lines of his dissent:  “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 the summary judgment matters the majority chooses to reverse.”

Kraft filed a petition for rehearing en banc which was denied by the court; accordingly, the District Court will be left to resolve these issues.

 The full Seventh Circuit opinion is available at: