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District Court Declines to Dismiss Kraft 401(k) Fee Case

In an opinion dated March 16, a judge for the Southern District of Illinois ruled against defendants’ motion to dismiss claims that they breached their fiduciary duties by permitting the Kraft Foods 401(k) plan to charge excessive and undisclosed fees. The court also refused to strike or order clarification of portions of the complaint that defendants claimed were lengthy and ambiguous, but did grant defendants’ motion to transfer the case to the Northern District of Illinois.

The class-action against Kraft is one of 14 similar lawsuits against 401(k) sponsors, fiduciaries, and service providers around the country. Although each suit has unique elements, all the cases attack revenue sharing, a practice in which investment funds (most often mutual funds) share a portion of their fees with plan service providers. Plaintiffs allege that this practice causes participants to pay excessive fees, and thus lowers their retirement savings.

Kraft’s motion to dismiss, which has been pending since December 8, argued that the allegations in the complaint were too generalized to allow the defendants to understand the underlying legal claims. Judge David Herndon brushed this notion aside in a 16-page opinion, stating that it was “obvious” that dismissal was unwarranted because the complaint was comprehensible to “persons of reasonable intelligence.”

In contrast to a recent ruling in the Exelon 401(k) case, Judge Herndon also refused to dismiss claims for investment losses. Herndon held that the plaintiffs’ statements about investment losses were aimed primarily at the potential affirmative defense offered by ERISA Section 404(c), which shields 401(k) fiduciaries from responsibility for losses caused by participant investment control. Since defendants have the burden of proving affirmative defenses, Judge Herndon reasoned, there was no need for plaintiffs to raise the issue at all.

Judge Herndon’s rulings were largely a defeat for defendants, but they were hardly unexpected. Defendants in most of the 401(k) fee cases have elected to pursue “scorched earth” litigation tactics designed to wear down plaintiffs through repeated pretrial motions. Spencer Fane will continue to track this important litigation–please check our 401(k) Fee Litigation Update Center regularly or sign-up to be e-mailed when new developments occur.