Caterpillar settlement could make 401(k) advisers vulnerable to fee suits

Caterpillar Inc.'s announcement 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 advisers and mutual fund companies. Not only could the settlement open the door to lawsuits against plan sponsors, it also might put pressure on large companies to move away from using retail mutual funds in their 401(k) plans, experts said. On Nov. 5, Caterpillar agreed to pay $16.5 million to settle a lawsuit alleging that its 401(k) plans charged its employees unreasonable and excessive fees. The suit, which was filed in 2006, was one of a dozen lawsuits filed by the law firm Schlichter Bogard & Denton against companies over 401(k) fees. Although 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, said 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,” he said. “I think there will more of these cases.” But that doesn't mean that participants will always be victorious in future cases, said Greg Ash, head of the Employee Retirement Income Security Act litigation group at Spencer Fane Britt & Browne LLP. 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, he said. “There was a hint of self-dealing there that you don't find in many other cases,” Mr. Ash said. That won't keep plaintiff's attorneys from filing cases, he said. “I think this will at the very least drive the settlement levels up,” Mr. Ash said. The Caterpillar settlement also has implications for the mutual fund industry; in the settlement, the company said that it will no longer use retail mutual funds in its 401(k) plan. Instead, the firm will use cheaper options such as 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,” Mr. Stone said. Caterpillar's settlement of Martin v. Caterpillar Inc. is pending before the U.S. District Court of Illinois. E-mail Jessica Toonkel Marquez at [email protected].