Caterpillar Settles 401(k) Lawsuit
Posted on Thu, Aug 19, 2010
What can the Caterpillar settlement tell us about managing fiduciary risk?
Caterpillar, Inc. has a
received final approval on its settlement of a 4-year-old lawsuit in which the plaintiffs’ claimed the company should have offered cheaper investment options to its plan participants. Caterpillar will pay 16.5 million to participants in the companies’ 401(k) plans. More importantly, (at least to those of us who are not employed by Caterpillar) Caterpillar has agreed to substantial changes in their plan structure.
Among these plan structure changes are agreements to exclude “retail mutual funds as core investment options for a period of time”, provide additional fee disclosures, and a commitment to “increase and enhance” communications with employees about 401k investment options and fees.
Additionally, and perhaps most significantly, Caterpillar also agreed not to let investment consultants serve as investment managers and will not allow investment consultants to receive compensation from plan investments ("revenue sharing").
For over ten years, the company offered plan investors a group of mutual funds that were advised by a wholly owned subsidiary, creating an inherent conflict of interest that led to higher fees for participants. While this level of self dealing is rare, it’s not wholly unlike structures where investment advisory firms also offer investment management services, and recommend their own products.
Had Caterpillar hired an independent plan consultant in the first place they would likely not have ended up in their current predicament. An independent consultant would have seen the conflict of interest in using the subsidiary and would have no incentive or reason to offer retail mutual fund options under a plan of this size (institutional mutual funds, collective trusts and separate accounts are more appropriate). A quality independent plan consultant would also take responsibility for plan communication as this is an extremely important fiduciary responsibility component that is often undervalued or overlooked by plan sponsors.
Fiduciary 360, LLC estimates that ERISA litigation has increased 25% per year since 2005. Cases are increasingly moving from the individual to class action level and this case will likely exacerbate this growth, fiduciary issues must be taken seriously.
On its surface this case is one that revolves around fees, but this may be treating the symptom and not the disease. At its core this is a case about hiring quality plan consultants that are objective and will acknowledge their fiduciary responsibility to the plan, only then can you be sure your consultants are working in your best interest and managing your fiduciary risk.
This material has been sourced from case documents found at caterpillarerisasettlement.com and is provided for general information and is subject to change without notice. Every effort has been made to compile this material from reliable sources; however no warranty can be made as to its accuracy or completeness. The opinions expressed are those of the author and not necessarily those of Geneos Wealth Management, Inc.
