I had a choice of three paths today: 1) I could opt not to blog; 2) I could blog about Senator Tom Coburn's (R-OK) 614 page proposal to cut $9 trillion from the federal budget over the next 10 years; or 3) I could blog about Northern District of Illinois Judge Ruben Castillo's partial denial of summary judgment on behalf of defendants in George v Kraft Foods. As I did not blog yesterday, I ruled out option #1. As Judge Castillo's decision weighing in at a mere 35 pages seems a far smaller burden on my precious eyes, I selected option #3 over option #2.
So, what's so important about George v Kraft Foods? I find it an interesting case for a few reasons. On the other hand, there is lots of legal wrangling going on there and as I have no formal legal training and offer no legal advice, there are lots of things that I leave out. If you want to know what Judge Castillo said about the oh so compelling concepts of res judicata and collateral estoppel, which I understand can also be referred to as doctrines of claim preclusion and issue preclusion, respectively, I am certain that you will be able to find highly skilled attorneys who will choose to write on these topics.
Here, we do not write about such things. First, we are not qualified. Second, and as important if we are to retain readers, we do not think that most of our readers will find this interesting (if you do, you may be in the wrong place). Here, what we do try to write about are things that regular people can associate with (our definition of regular people is far different from the definition that might be used by the supermarket tabloids, but we like our definition).
This case has been going on for quite a bit of time. As partial background, plaintiffs were participants in defined benefit and defined contribution plans sponsored by Kraft Foods and its successor companies. At some point in time, the Investment Committee for the defined benefit plan(s) elected to change the investment policy to hold 5 years worth of benefit payments in fixed income instruments and the remainder in S&P 500 Index funds. This was done after what appears to have been fairly comprehensive analysis that included the determination that large cap equity investments represent a fairly efficient market, and as such, a passively managed index fund is likely to outperform an actively managed fund in the same asset class, net of fees.
Concurrent to this analysis, the (I understand it to be the same one) Committee maintained a fairly rigorous process of monitoring the investment options available to participants in the defined contribution plan(s). The options made available to participants did not exclusively include passively managed funds. This was the basis for the most interesting of the plaintiff's claims.
Plaintiffs have asserted that the same ERISA standard of prudence applies to defined contribution plans as to defined benefit plans. In this assertion, they are undoubtedly correct. Plaintiffs further assert that Kraft and its Committee violated the ERISA standard of prudence by not offering low-cost, passively managed options in the defined contribution plan when they made that change in the defined benefit plan.
Defendants sought summary judgment. (At this point, we must insert our undereducated legal knowledge to explain.) In a motion for summary judgment, the Judge must consider that a jury will look at all of non-movers (Plaintiffs, in this case) claims in the most favorable light possible and still find no reasonable basis on which to rule in favor of non-movers. In this particular case, Judge Castillo has found that a jury could reasonably find in favor of Plaintiffs, so he denied summary judgment.
Is this a horrible ruling? I don't know. I haven't read all the pleadings of Plaintiffs and Defendants (and I'm not going to). It's the Judge's analysis, though, that bothers me. The Judge's own writing (in his opinion) underscores that Defendants engaged in a truly thorough and rational process of evaluating investment options in each type of plan. Clearly, Defendants do not have the ability to foresee or foretell the future. But, I have seen far lesser analysis from other Committees whose Counsel advised that they were acting prudently.
Defendants argued that "it makes no sense to judge fiduciaries' actions with regard to a defined contribution plan in light of actions taken with a Defined Benefit Plan." Further, Defendants asserted that "the prudence of a defined contribution plan fiduciary in selecting investment options to offer cannot be determined by
looking to his decisions as fiduciary for a Defined Benefit Plan-the two are not enterprises of 'like character and with like aims.'" Defendants finally claimed that while a shift in investments in the defined benefit plan may have made sense for that plan, such same shift may not have been appropriate for the defined contribution plan.
Judge Castillo either does not agree, or does not feel so strongly that a jury could not possibly disagree.
I do not know whether to struggle more with the Judge's ruling or with the arguments put forth by Defendants. There is a good reason for this -- I have not seen all of Defendant's arguments, only the ones cited by the court.
Here are some of my thoughts. A prudent person, when selecting the investment options for a retirement plan, must consider the obligations being supported by those assets. In a defined benefit plan, there is one pool of assets available for one consolidated (over all participants) pool of obligations. A defined benefit plan is assumed to be ongoing, essentially for perpetuity unless there is evidence to the contrary. A defined contribution plan, on the other hand, has as many pools of obligations as it has participants. So, in prudently selecting available investment options in a defined contribution plan, one could argue that there should be options available appropriate for each separate pool of obligations. This necessarily makes the analysis for defined benefit and defined contribution plans different.
While it may still be possible that a reasonable jury would rule against Defendants, I do not find the Judge's analysis to be reasonable.
For plan sponsors, at least those that maintain multiple plans that may have reason to have different investments to cover their obligations, this adds a significant wrinkle. I cannot recall ever having seen a company that sponsored both types of plans consider the investment strategy for its defined benefit plan(s) when choosing available investment options for its defined contribution plan(s).
For the time being, in light of Kraft, perhaps it would be advisable for Committees to specifically document why the DC investment options may not mirror the assets underlying the DB obligations. Frankly, this may mean that for a company that is a sponsor of both types of plans, a DC investment adviser who is not fully schooled in the vagaries of DB plans may not be sufficient. And, conversely, a DB investment adviser will need to be equally competent on the DC side of the spectrum. The number who can handle both is smaller than one may think. I know where you can find a few.