Alert September 30, 2010

Federal District Court Grants Motion for Class Certification in Case Alleging Imprudent Selection of Plan Investment Options

Last month, in George, et al. v. Kraft Foods Global, Inc., et al., Case No. 08-c-3799 (N.D. Ill. Aug. 25, 2010) (“Kraft II”), the U.S. District Court for the Northern District of Illinois granted a motion to certify as a class action a lawsuit filed by several plan participants challenging the prudence of including two actively managed mutual funds in their employer’s defined contribution plan (the “Plan”).

In their Second Amended Complaint, the plaintiffs asserted claims for ERISA breach of fiduciary duty against the plan sponsor and other plan fiduciaries alleging, among other claims, that the defendants caused the Plan to be charged excessive administrative fees and imprudently included actively managed mutual funds in the Plan’s investment lineup when low cost index options were readily available. An earlier case against some of the same defendants asserting similar claims, George et al. v. Kraft Foods Global, Inc. Administrative Committee, et al., No. 07-1713 (N.D. Ill.) (“Kraft I”), had been dismissed when the court granted the defendants’ motions for summary judgment. In Kraft II, the allegations against the defendants had been narrowed first by the court granting in part a motion to dismiss in December 2009, and second, by the parties’ subsequent stipulation that certain counts would be dismissed. The only count that remained in Kraft II by the time the court ruled last month on class certification was the plaintiffs’ claim for alleged imprudent investment selection based on the defendants’ inclusion in the Plan of two actively managed retail mutual funds instead of passively managed separate accounts and/or commingled pools.

In opposing the plaintiffs’ motion for class certification, the defendants argued that two of the named plaintiffs lacked Article III standing because they did not invest in the funds at issue. The defendants further argued that the plaintiffs’ claims did not meet the typicality requirement for class certification under Federal Rule of Civil Procedure 23 insofar as the named plaintiffs’ claims could not be typical of putative class members who actually invested in the challenged funds.  The court rejected this argument, stating that the plaintiffs’ imprudent investment selection claim is, at bottom, a challenge to the defendants’ alleged “deficient investment policies” and “not tied to actual investment in any particular fund.”  Accordingly, the court held that the fact that the proposed class representatives did not invest in the two funds at issue did not deprive them of standing to pursue class claims because the “[p]laintiffs and their proposed class share the same injury: the invasion of their legally protected interest in a prudent fiduciary.”  Other courts have reached opposite conclusions given similar challenges. See, e.g., Hans v. Tharaldson, No. 05-cv-115, 2010 WL 1856267 (D.N.D. May 7, 2010) (in ERISA suit arising out of a plan’s purchase of company stock, proposed class representatives whose plan assets were invested in options other than the challenged stock fund did not meet typicality requirement necessary to represent a class including participants invested in the stock fund).