Caterpillar Ready to Finalize $16.5M Fee Lawsuit Settlement

Heavy equipment manufacturer Caterpillar Inc. has agreed to a $16.5 million settlement of an excessive fee lawsuit in federal court in Illinois.

A company newsletter said the September 2006 lawsuit leveled fiduciary breach charges against Caterpillar regarding its four 401(k) plans for workers and retirees (see “Caterpillar Fee Suit Clears First Legal Hurdle“).

According to the announcement, the net proceeds of the settlement will be allocated to accounts of current and former participants based generally upon the number of years a participant maintained an account balance in one or more of the plans.

This will happen after court-approved attorney’s fees and expenses of settlement administration have been deducted. Distributions would begin after U.S. District Judge Joe Billy McDade of the U.S. District Court for the Central District of Illinois grants final approval of the settlement, and all appeals have been pursued.

Even though one of the breach claims had to do with the actions of Caterpillar Investment Management Ltd. (CIML), formerly a Caterpillar subsidiary, the company said CIML was sold in 2006 before the suit was filed.  As a result, in May 2006, the Preferred Funds, advised by CIML, were replaced with other investment options, including separate accounts.

The suit also alleged Caterpillar kept too much cash in the company stock fund in the 401(k) plans .
Caterpillar contended in its statement that it had complied with the Employee Retirement Income Security Act (ERISA) and that it only agreed to the settlement because it thought the move would be in the best interests of the company and its shareholders.

The Web statement said the company will increase employee communication about 401(k) investment options and associated fees. Evercore Trust Company will independently monitor the plans during a two-year settlement period.

Also, during the two-year period, Caterpillar will continue to limit its cash holdings in the company stock fund investment option, and will not include retail mutual funds as core investment options in the plans. The statement said that if service contracts come up for renewal, Caterpillar will undertake a request for proposal.

IMHO: Worth Whiles

I’m sure you’ve seen that commercial where a series of more-or-less everyday events and their price tags are presented.

The commercial builds to larger and more exotic events (and price tags) until they culminate with some extraordinary event—one that the announcer declares is “priceless.”

As an industry, we have long worried about the plight of the average retirement plan participant who doesn’t know much (if anything) about investing, who doesn’t have time to deal with issues about their retirement investments, and who, perhaps as a result, would really just prefer that someone else take care of it, though it’s not always clear how much they value that effort.

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What gets less attention—but is just as real a phenomenon—is how many plan sponsors don’t know anything about investments, don’t have time to deal with issues about their retirement plan investments, and who, perhaps as a result, would also really just prefer that someone else take care of it. But how much will they pay for that?

Now, there’s a difference between choosing investments and selecting a trusted adviser to do so. However, as complicated as the former can be, there are certain touchstones that even an amateur can rely on, IMHO: developing a menu that encompasses a broad array of choices, that fill out a style box grid, that factor in performance results, and/or fund rankings. I’m not saying it’s “easy,” or should be entrusted to amateurs (particularly when issues of fiduciary liability are involved), but it’s certainly manageable.

Quantify Able?

Contrast that with the myriad challenges attendant to selecting an adviser—particularly when you consider that PLANSPONSOR’s surveys routinely show that plan sponsors choose an adviser primarily based on the quality of the advice they provide (primarily to committees, but a close second is the advice rendered to plan participants). One can’t help but wonder how that advice is quantified (certainly not in the same way that investment funds can be). Doubtless, that helps explain why so many advisers are hired not on what they know, but on WHO they know.

But for many plan fiduciaries, the obstacle to hiring a retirement plan adviser is financial, not intellectual. Particularly for a plan sponsor who has not previously employed those services—or, more ominously, in the case of one who has hired an adviser that didn’t hold up their end of the bargain—the additional costs of hiring an adviser can be problematic. The question that is frequently asked is, “Why should I hire you?” But, IMHO, the question that is really being asked is “Why should I pay you that much?”

There are ways, of course, to quantify the value of your services, ways that quantify not only what you are worth, but why your fees are what they are. In the most obvious case, you come in and demonstrate the ability to save a plan money. That’s clearly added value, and value that is readily measured (that, of course, only lasts a year, maybe two; after that, the baseline has been reset in terms of savings expectations). Similarly, your ability to increase plan levels of participation, deferral, and investment diversification also adds value—but value that, IMHO, like the value of retaining qualified talent, is harder to quantify.

Many advisers promote their services as a shield against litigation, or at least some kind of buffer against the financial impact of such an event, but in my experience, while most employers are glad to get/take the “warranty” (implied or explicit), they generally aren’t willing to pay very much extra for it.

Where else can you make a difference?  You’ve no doubt seen surveys that show that, in the course of a year, most participants spend more time thinking about—and planning for—their vacation than about their retirement plan investments. Ask any plan sponsor client or prospect how much time they spend working on, or worrying about, their retirement plan, and you’ll probably find a similar imbalance.

Of course, plan sponsors, like plan participants, know that they should be spending more time on such matters—and most will admit that, no matter how much time they are spending, they should be spending more. So, how much time are they spending? How much more do they wish they were spending? How can your involvement reduce the time they spend and/or improve the quality of the attention they give their retirement program?

You have the ability to share with them insights—from your other clients, from industry surveys that you gain from attending industry conferences; you can help them make better decisions quicker because your experience offers insights to which they wouldn’t otherwise have access.

So, save them money if you can, save them aggravation if you have to, but in this crazy, hectic period, if you can save them time—well, IMHO, that’s truly “priceless.”

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