Employers that sponsor a retirement plan should be concerned with the risk of excessive fee claims, as the number of these has skyrocketed recently.
In 2006, when the first fiduciary excessive fee claims appeared, only large companies with well over a billion dollars in retirement plan assets were being sued. In the past few years, however, not only have the number of fiduciary excessive fee claims increased, but so have the range of sizes and kinds of plan sponsors and industries being targeted.
What we’re seeing in excessive fee claims
As a provider of fiduciary liability insurance, Chubb has been observing the following claim trends:
- The pace of claim filings increased more than four-fold industry-wide in 2020. Other than a brief bubble of filings against private universities in 2016, the number of excessive fee claims has been relatively low. That changed last year when the number of claims jumped dramatically.
- It’s not just the large plans that are getting sued anymore. Historically, the vast majority of plans being sued had well over $1 billion in plan assets. Recently, sponsors with much smaller plans are increasingly being targeted.
- It’s difficult to identify what plan criteria will be targeted by plaintiffs. There is no specific type of industry being sued and plans with numerous types of investments and fee arrangements are now pressed to defend themselves against lawsuits.
- Cases are expensive to defend, often costing millions of dollars—and settlement amounts continue to climb. Even if the defendants win on an early dismissal, lawsuits are still costly, and if the case survives an early motion to dismiss, defense costs can rise meteorically.
Are you at risk?
While plan fiduciaries are unable to stop a claim from being filed against them, there may be things they can do to help reduce the chances of a lawsuit or increase their chances of successfully defending against a lawsuit.
Below are some of the plan characteristics and practices that have been critiqued in lawsuits by plaintiffs. Please note that the below is for general informational purposes only and Chubb does not intend to provide legal or other expert advice in this matter. For further information, plan fiduciaries should consult with an ERISA expert to discuss how to identify and avoid any potential plan vulnerabilities.
Failure to have a strong, prudent process in place
Plaintiffs commonly allege that plan fiduciaries did not adequately negotiate fees or monitor fund performance. These claims are often based, at least in part, on the failure to have a prudent process in place to manage the plan and plan assets because:
- A robust plan process should, at least in theory, lead to better decision making on the merits.
- Fiduciaries are required to be prudent—not perfect. Thus, even when a decision turns out, in retrospect, to have been allegedly “wrong” on the merits, a breach of fiduciary duty claim may still be defeated so long as the fiduciary followed a prudent process.
Failure to have plan processes, fiduciary decisions, and their underlying rationale well-documented, may deprive fiduciaries of a powerful defense.
Lack of adequate expertise
Fiduciaries who purportedly lack the requisite expertise or knowledge to administer a plan or manage plan fees and investments may be sued by plaintiffs for this shortcoming and for failing to hire independent professionals who have that expertise and knowledge.
Failure to prudently select recordkeepers and negotiate their fees
Plaintiffs commonly allege that plan fiduciaries should have been more diligent in selecting the plan’s recordkeeper, including conducting requests for proposal or competitive bidding. Plans that have more than one recordkeeper have also been targeted.
Additionally, plaintiffs have sued plans that are paying fees to a recordkeeper based on a percentage of assets under management instead of paying fees on a per capita basis. Finally, the use of revenue sharing to pay recordkeepers has also been criticized.
Failure to prudently select plan investments and investment expenses
Investment fees are often scrutinized, with plaintiffs alleging that fiduciaries imprudently selected more expensive investment options when less expensive, superior options were available.
Alison Martin
Plaintiffs “second guess” investment performance and complain that fiduciaries failed to properly review and analyze investment performance and act on a timely basis to address underperformance.
Fiduciaries may also be sued for using ill-suited or inappropriate benchmarks to monitor investment performance or for misaligning investment offerings with the plan’s investment policy statement. Plaintiffs have also cited as improper plans that invest heavily in funds that are affiliated with the plan’s recordkeepers, claiming the inclusion of those funds is the result of conflict-driven advice.
Finally, plans have been sued for offering too many investment options on the grounds that doing so makes it difficult for participants to make intelligent choices for their own portfolios.
Equally important, investment fees are often scrutinized, with plaintiffs alleging that fiduciaries imprudently selected more expensive investment options when less expensive, superior options were available. Some of the scrutiny includes using actively managed funds instead of index funds, using retail share classes instead of institutional share classes, and using mutual funds instead of collective investment trusts.
It’s up to you to help protect yourself and your plan
There is no way to predict with any certainty whether you, as a fiduciary, or your retirement plan will be targeted with a fiduciary liability suit. However, you may be able to mitigate some of your risk by having a prudent, well-documented plan process in place, using competent ERISA experts, and of course, having insurance in place with an experienced fiduciary liability insurance carrier.
Alison Martin is Senior Vice President and Fiduciary Product Manager for Chubb’s North America Financial Lines division.
SEE ALSO:
• Which 401k Plans Get Sued and Why?
• Insurer Hits Back at Excessive Fee Litigation Plaintiffs
• 401k Litigation Spike Spurs Trend in Fiduciary Outsourcing
• 10 Litigation Lessons for 401k Fiduciaries