Caterpillar Settlement Could Make 401(k) Advisors Vulnerable to Lawsuits Over Fees

By Staff Report

Nov. 16, 2009

Caterpillar Inc.’s announcement last week that it has reached a tentative settlement over the fees it charged its 401(k) plan participants may be bad news for plan sponsors, their advisors and mutual fund companies.

Not only could the settlement open the door to lawsuits against plan sponsors, but it also might put pressure on large companies to move away from using retail mutual funds in their 401(k) plans, experts said.

On November 5, Caterpillar agreed to pay $16.5 million to settle a lawsuit that alleged its 401(k) plans charged its employees unreasonable and excessive fees.

The suit, which was filed in 2006, was one of a dozen lawsuits against companies over 401(k) fees filed by the law firm Schlichter, Bogard & Denton.

While some of those suits were thrown out by the courts, the fact that Caterpillar settled is a signal to plaintiff’s attorneys that they have a leg to stand on in future litigation, noted Bart R. Bonga, vice president of Rothschild Investment Corp., a financial advisory firm that works with retirement plans.

“This is a watershed,” said Don Stone, president of Plan Sponsor Advisors, whose firm also works with retirement plans. “It says that a lot of these large companies would rather settle than go through the agony and years of possible litigation. I think there will more of these cases.”

But that doesn’t mean participants will always be victorious in these cases, said Greg Ash, head of the Employee Retirement Income Security Act litigation group at Spencer Fane Britt & Browne.

The Caterpillar case was a bit unique in that one of the company’s affiliates was managing some of the funds in the 401(k) plan, Ash said.

“There was a hint of self-dealing there that you don’t find in many other cases,” Ash said.

That won’t keep plaintiff’s attorneys from filing cases anyway, he said.

“I think this will at the very least drive the settlement levels up,” Ash said.

The Caterpillar settlement also has implications for the mutual fund industry, because in the settlement the company said it would no longer use retail mutual funds in its 401(k) plan. Instead, the firm will use cheaper options, like separate accounts and collective trusts.

“I think this settlement raises the question whether plan sponsors should be using retail mutual funds if there are other options available,” Stone said.

Caterpillar’s settlement of Martin v. Caterpillar Inc. is pending before the U.S. District Court of Illinois.

Filed by Jessica Toonkel Marquez of InvestmentNews, a sister publication of Workforce Management. To comment, e-mail

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