A 401(k) Fee Lawsuit First by Christopher R. Thixton, QPA and Mark Zielinski, QPA, QKA

The retirement plan industry may look back at this point in time and remember when the first set of teeth bit into the 401(k) fee lawsuit landscape. For years plan sponsors focused on out-of-pocket expenses and did not scrutinize revenue sharing payments or how other sources of plan revenue traded hands. Then a wave of 401(k) fee lawsuits hit the industry. The Department of Labor came on the scene with proposed regulations on fee disclosures, members of Congress started talking and the industry was in a state of flux. After the first of the fee lawsuits were dismissed, the industry breathed a sigh of relief. However, the recent announcement by Caterpillar, Inc. to settle their 401(k) fee lawsuit puts the industry back into a state of flux and raises the question again about retirement plan fees.

A Series of Lawsuits Hit the Industry

Over three years ago, in September, 2006, the first lawsuits targeting 401(k) plan fees and expenses were filed in federal courts by a law firm based in St. Louis, Missouri. These lawsuits were seeking class-action status on behalf of plan participants. The cases primarily targeted corporations, including the officers and the members of their retirement plan committees. Companies named in the lawsuits included Bechtel Corporation, Caterpillar, Inc., Deere & Company, International Paper Company and Lockheed Martin Corporation.

The complaints and charges brought by these lawsuits claimed violations of the Employee Retirement Income Security Act (ERISA). The charges generally alleged plan fiduciaries failed to meet their fiduciary responsibilities by (1) allowing the payment of excessive fees and expenses out of plan assets, (2) not prudently monitoring the fees charged by the plan’s service providers, (3) failing to inform themselves of, and understand, the various methods vendors use to collect payments and other revenue from 401(k) plans, and (4) not fully disclosing to participants the fees and expenses paid by the plan.

Over time, other law firms began investigating retirement plans. Now more than two dozen lawsuits have been filed alleging excessive 401(k) plan fees and expenses. Several of these cases have been dismissed. However, summary judgment decisions are still to be determined for other cases.

Caterpillar Case

Of significant interest is the tentative settlement in the 401(k) fee lawsuit against Caterpillar, Inc. In this case, participants claimed plan fiduciaries caused the plan to pay unreasonable fees and expenses. They claimed plan fiduciaries failed to properly disclose fees to participants. Although the court ruled plan fiduciaries did not breach their fiduciary duties by failing to make disclosures regarding revenue sharing because such disclosures are not required by ERISA; the court did not dismiss other complaints in the case.

According to the announcement on November 5, 2009, Caterpillar, Inc. has agreed to a $16.5 million settlement of the 401(k) fee lawsuit over the administration of four 401(k) plans for Caterpillar employees and retirees. Under the terms of the settlement, which must be approved by both an independent fiduciary and the Judge in the case; the net proceeds of the settlement, after court-appointed attorney’s fees and expenses of the settlement administration have been deducted, will be allocated to participant accounts and former participants based generally upon the number of years a participant maintained an account balance in one or more of the plans.

During a two-year settlement period, Caterpillar, Inc. will increase and enhance communication with employees about 401(k) investment options and associated fees. An independent trust company will monitor the plan and will not include retail mutual funds as core investment options in the plans. Caterpillar will also undertake a request for proposal to select or retain the plans’ record keeper, and if any service contracts come up for renewal, Caterpillar will undertake requests for proposal.

Impact on the Industry

The effect of this settlement will ripple well beyond Caterpillar and its participants. Plan sponsors will need to rethink how they protect themselves against lawsuits for the retirement plans they voluntarily provide for their employees.

The rulings in these 401(k) fee lawsuits will influence the direction and scope of future lawsuits. There have been no court decisions ruling against a defendant in 401(k) fee lawsuits to date. However, the Caterpillar case is significant because it is the first within the series of fee lawsuits whereby the defendant has agreed to settle out of court. The potential impact of this case is tremendous because of what it may encourage. Without a ruling against a defendant or a settlement, there would be little impetus for future lawsuits. The Caterpillar settlement draws attention to a complex industry issue and could welcome the filings of similar lawsuits.

With Congress and the Department of Labor weighing in on plan fees combined with Caterpillar’s recently announced settlement and potential new fee lawsuits, fiduciaries and plan committees should be well aware of their duty to evaluate plan fees and know how to determine if plan fees are reasonable.

Posted in Retirement News.