A court ruling reversing a decision affecting Wal-Mart coupled with an agreement by Caterpillar to settle a 401(k) lawsuit will probably encourage more employees to begin class-action litigation because of retirement-fund fees. There are anywhere from one to two dozen similar suits pending in the courts already.
Employees suing major corporations over allegedly excessive 401(k) fees got a big boost recently when one company, Caterpillar Inc., offered a $16.5 million settlement, and another, Wal-Mart Stores Inc., lost a court battle that would have ended the litigation against them.
As a result, experts expect more companies embroiled in 401(k) fee suits to settle in order to avoid lengthy litigation and costly fact finding.
More than a dozen companies are currently battling class-action suits filed by employees under the federal Employee Retirement Income Security Act. Corporate defendants were encouraged earlier this year when Deere & Co., based in Moline, Ill., won its case, but Caterpillar's decision to settle adds "fuel to the fire" and encourages employees to pursue their suits, according to Don Stone, president of Plan Sponsor Advisors in Chicago, a consulting firm that works with retirement plans.
"The fact you have someone settling, [that] they're seeing this as a long, drawn-out process, puts pressure on others to settle," says Stone, who has served as an expert consultant in two fee cases, neither of which involved Wal-Mart or Caterpillar. He says as many as 24 or 25 fee cases are still in the courts.
"What they're looking at is very long litigation. It's a judgment call whether they want to tie their resources up for what could be a long time, five years or longer," says Stone, noting that "there's the risk they could lose [a court battle]. When you settle, you get the certainty" that it's over.
Caterpillar, based in Peoria, Ill., announced on Nov. 12 that it had made a "strategic" business decision to settle the case of Martin et al. vs. Caterpillar Inc., filed more than three years ago. The settlement must be approved by federal Judge Joe McDade in the U.S. District Court for the Central District of Illinois, and an independent fiduciary.
"We believe Caterpillar would have prevailed in the end. It was a strategic decision. Would it make sense to spend five to seven years fighting a legal battle, especially in the [highly technical] area of ERISA?" asks Caterpillar spokesperson Jim Dugan.
The net proceeds will go to roughly 80,000 employees and retirees.
The Caterpillar suit had a unique wrinkle: In an alleged conflict of interest, the 401(k) plan offered participants the "Preferred Group of Mutual Funds" as investment options from 1992 to 2006, which were advised by a wholly owned Caterpillar subsidiary, Caterpillar Investment Management.
Dugan stresses that Caterpillar exited the investment management business in 2006, before the suit was filed. What's more, the company stopped using retail mutual funds as core investment options in 2006 and has no plans to resume the investments.
Meanwhile, Wal-Mart suffered a blow on Nov. 25, when a three-judge panel in the Eighth Circuit Court of Appeals for the Western District of Missouri reversed a lower court ruling that had dismissed the class-action suit filed by employee Jeremy Braden on behalf of more than one million employees.
The suit alleges that Wal-Mart invested in retail mutual funds instead of lower-cost institutional funds, and that plan trustee Merrill Lynch engaged in undisclosed revenue-sharing transactions, or kickback payments, from the mutual funds.
The appeals court overruled the lower court's decision that Braden did not have standing to sue for losses before he was hired. In allowing the case to proceed, requiring Wal-Mart and Merrill Lynch to produce previously withheld documents, the opinion states: "It would be perverse to require plaintiffs bringing prohibited transaction claims to plead facts that remain in the sole control of the parties who stand accused of wrongdoing."
The plaintiffs' attorney, Derek Loeser, a partner in Keller Rohrback in Seattle, says, "We look forward to the opportunity to make our case that Wal-Mart should have used its massive bargaining power for the benefit of its employees through the selection of reasonably priced funds, rather than retail off-the-shelf funds that are chosen because of financial incentives that benefit the plan trustee Merrill Lynch."
Responding to the setback, Wal-Mart spokesperson Michelle Bradford says the company is "proud to provide a high-quality, innovative retirement plan to help more than one million of our Wal-Mart associates prepare for the future. This year, we awarded roughly $2 billion to U.S. hourly associates through financial incentives that include $788.8 million in 401(k) and profit sharing contributions and $933.6 million in bonuses."
The Wal-Mart ruling is a "pretty significant victory" for the plaintiffs, says Anthony Antognoli, an ERISA and employee benefits attorney with Hinshaw and Culbertson in Chicago.
"It got past the standing issue. [The court] is saying the plaintiff didn't have the opportunity to show the fees were unreasonable," says Antognoli. "In general, what a lot of these suits are designed to do is to get these employers to open the books and hopefully to give them a barrage of discovery requirements that makes it difficult to fight ... [to provide] everything out there that led to the decision to invest in these investments.
"A lot of employers will decide it's not worth it to fight it ... and in the end will settle," he says.