Since we last reported on the status of the 401(k) excessive fee class actions in the June 25, 2009 ERISA Litigation Update, there have been two significant settlements – one in a participant-filed suit and one in a suit filed by a plan fiduciary on behalf of the fiduciaries of all plans serviced by the same provider.
In Martin, et al. v. Caterpillar Inc., et al., Case No. 07-1009 (C.D. Ill.), the parties filed on November 20, 2009 a motion for preliminary approval of a settlement of claims regarding the administration of four 401(k) plans sponsored by Caterpillar. The plaintiffs in their complaint alleged that the plans’ fiduciaries breached duties owed under ERISA by allowing the plans to pay excessive investment management and other fees, by maintaining excessive cash in the plans’ company stock investment fund and by offering a preferred group of plan investment options that were advised by a wholly owned Caterpillar subsidiary.
Under the terms of the settlement, which are subject to court approval as well as approval by an independent fiduciary, Caterpillar will pay $16.5 million, the net proceeds of which (after the payment of attorneys’ fees and costs and any administrative expenses) will be allocated to participant accounts and former participants based upon the number of years a participant maintained an account balance in one of the subject plans. In addition to this monetary payment, the Caterpillar defendants agreed that for a two-year period following the settlement, the company will increase and enhance communication with employees about the plans’ investment options and associated fees, including by separately disclosing investment management and administrative fees. Evercore Trust Company will also serve as an independent monitor for the plans. The defendants also agreed to limit the cash holdings in the company stock fund and to engage in requests for proposal when service contracts come up for renewal. Caterpillar agreed that it will not include retail mutual funds as core investment options in the plans for the duration of the settlement period. While the agreement allows for mutual fund investments through a brokerage window, this particular concession by the Caterpillar defendants is of note given that the plaintiffs’ bar has increasingly focused its attack in this wave of fees-related cases on the use of retail mutual funds in large 401(k) plans. A preliminary approval hearing for the Caterpillar settlement has been set for April 21, 2010, with the final approval hearing expected to take place on August 12, 2010.
In February 2010, a settlement was also announced in Phones Plus, Inc. v. Hartford Life Insurance Co. et al., Case No. 06-1835 (D. Conn.). The Phones Plus case is one of a handful of suits filed not by a plan participant but rather by a plan fiduciary purporting to represent a class of fiduciaries of all plans serviced by the same provider – here, Hartford Life Insurance Company (“The Hartford”). The Phones Plus complaint, filed on November 14, 2006, alleged that The Hartford breached ERISA fiduciary duties owed to plans for which it acted as recordkeeper by entering into revenue sharing agreements with mutual fund companies that offered investment options on The Hartford’s platform. Under these agreements, The Hartford was compensated for its recordkeeping services through revenue sharing payments in addition to the service fees negotiated in its contracts with client plans. The plaintiff characterized these revenue sharing arrangements as undisclosed “kickbacks” bearing no relationship to any services performed by The Hartford. The plaintiff further alleged that The Hartford’s ability to delete or substitute mutual funds on its platform rendered it a fiduciary within the meaning of ERISA. At the time the settlement was reached, motions for summary judgment and class certification were pending.
As part of the settlement, The Hartford agreed to pay $13.8 million to retirement plans that used it as a service provider between November 2003 and February 26, 2010. The Hartford also agreed to make certain changes to its business practices, including removal from its contracting documents limitations on a plan’s selection of investment options and restriction of its own ability to remove or substitute an investment option chosen by a plan. To effectuate this latter restriction, The Hartford has undertaken to seek approval from the relevant departments of insurance to revise its contracts to make clear that The Hartford will not delete or substitute from its menu a fund that has been chosen by a plan, except where the fund is no longer available. This settlement term relates to a central dispute in the case as to whether The Hartford’s right under its contracts to revise its product platform by changing the available investment options constituted discretionary authority over plan investments sufficient to give rise to ERISA fiduciary status. The contractual reservation of rights at issue is not uncommon in the industry, and has been the subject of litigation against other providers as well.
With respect to the plaintiff’s allegations regarding revenue sharing practices, The Hartford also agreed under the settlement to add language to its disclosures to make clear that the funds offered on its platform pay revenue sharing to The Hartford or to its affiliates, and to disclose the revenue sharing amounts paid by each fund. Both the Caterpillar and Phones Plus settlements impose disclosure requirements beyond those currently required by statute or regulation.