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Readers Select Top Fiduciary Stories of 2009: #4 Caterpillar Settlement

March 03
17:15 2010

1138348_42605426_camels_nose_royalty_fee_stock_xchng_300In November, this Fortune 100 company agreed to a $16.5 million settlement in a case alleging its 401k plan charged employees unreasonable fees. According to David Nolte in a article provided by Fulcrum Inquiry appearing on the web site HGExperts.com (“401(k) Fee and Disclosure Litigation Gets a Boost”), Caterpillar, in addition to paying the settlement, agreed to:

  1. Limit fees charged to participants, with such fees calculated on a flat fee or per participant basis
  2. Not allow investment consultants to also serve as investment managers
  3. Not allow investment consultants to receive compensation from plan investments
  4. Increase its communications with employees about investment options and fees
  5. Have an independent trust company monitor the plans
  6. Not include retail mutual funds as investment options
  7. Undertake competitive billing for all services as contracts come up for renewal

Mike Alfred, founder and President of 401k rating company Brightscope told FiduciaryNews.com last year that he’s “talked to a handful of the largest plan sponsors in the country in the last couple weeks and the Caterpillar settlement has been a topic of conversation several times. Plan sponsors can really see the ramifications of that case affecting them here and now.” Indeed, Financial Advisor reports (“Ruling A Boost For 401(k) Fee Lawsuits,” FANews.com, November 10, 2009) “while similar cases have been thrown out, last week’s resolution in the Caterpillar case may be a first big win for 401(k) plan participant.

But is Caterpillar instead the exception that proves the rule? Despite the Department of Labor’s recent push for increased fee disclosure, past DOL advisory opinions continue to provide cover for plan sponsors in the various lawsuits still pending. Pension Consultants, Inc. posted an article (“A 401(k) Fee Lawsuit First,” Christopher R. Thixton, QPA and Mark Zielinski, QPA, QKA, November 17, 2009) explaining that of the dozens of cases filed, “several of these cases have been dismissed.” Nolte specifically sites the Deere and Walmart cases, which were thrown out earlier in 2009. This author openly wondered why Caterpillar, which had the benefit of favorable case precedents had they been willing to continue to fight and take the attendant risks of litigation, would choose to settle.

In the end, perhaps the size of the settlement ($16.5 million) might be the light that shines most on 401k plan sponsors. This is a large price to pay for disclosure and due diligence a plan fiduciary can simply and consistently address, even if the fiduciary pays an independent fiduciary consultant to insure these disclosures and associated due diligence are taken care of. It may be the easiest action a 401k plan fiduciary to take to prevent the proverbial camel from sticking his nose under the tent.

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Christopher Carosa, CTFA

Christopher Carosa, CTFA

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