In George v. Kraft Foods Global, Inc., 2011 WL 1345463 (7th Cir. 2011), participants alleged that Kraft breached its fiduciary duties by not taking action to reduce or eliminate "transactional drag" and "investment drag" in two unitized company stock funds. The participants further alleged that excessive fees were paid to the plan's recordkeeper and that Kraft breached its fiduciary duties by failing to obtain competitive bids for recordkeeping services on a periodic basis.
"Transactional drag" results from transaction costs incurred by the fund when participants buy and sell stock. These costs are charged against the overall fund instead of being allocated to the accounts of participants who initiate the transactions. "Investment drag" occurs because the common stock fund includes a cash buffer, which is used to facilitate immediate distributions and provides a hedge against declines in stock value, but arguably decreases the overall return on investments in the fund.
The district court granted summary judgment for Kraft on both claims. The court found that the plan fiduciary had weighed the costs and benefits of methods to reduce transactional and investment drag and reasonably concluded that the costs of these solutions outweighed the benefits. The court also found that Kraft had prudently relied on its consultants' advice regarding the reasonableness of recordkeeping fees.
The Seventh Circuit reversed, finding no evidence in the record that the plan fiduciaries ever engaged in a review of and made an actual determination on transactional and investment drag, despite all the documentation of related discussions. The Seventh Circuit also held that the district court erred in determining that the fiduciaries had satisfied their duty of prudence by relying on the advice of consultants at the summary judgment stage. The Seventh Circuit remanded the case to the district court for further proceedings and for consideration on whether the fiduciaries had made a decision on transactional and investment drag and whether circumstances would have caused a prudent fiduciary to make a decision on such matters.
Reinhart Comment: This case underscores the importance of documenting all fiduciary decisions, including decisions not to act. Documentation should be contemporaneous to the decision and include the basis for the decision as well as a description of the process by which the decision was reached.