Over 90 excessive fee lawsuits were filed against defined contribution plans in 2020, bringing the total such cases to around 200 since 2015, according to a December white paper from Euclid Specialty, a fiduciary liability insurance provider. Euclid estimates only about 25% of filed motions are successfully defended.
Related: 2020 on Track for Fivefold Increase in 401k Lawsuits
“These lawsuits allege that defined contribution plan administrative and investment fees are too high, and that any investment performance that lags any plaintiff-asserted benchmark — a moving target — is actionable negligence that should generate huge indemnity payments and high attorney fees to the firms bringing these lawsuits,” Euclid wrote.
Euclid believes the cases are the result of opportunistic attorneys rather than true discontent among participants. Cases brought by plaintiffs revolve around three themes, according to the paper:
- Failure to monitor and control administrative expenses, including charging asset-based fees instead of per-participant fees, improper revenue sharing, failure to conduct due diligence on competitive providers and conflicts between recordkeepers
- Failure to manage investment fees
- Choosing improper investments, including offering too many options and favoring more expensive active funds
Euclid argues that these cases drive up the cost of premiums on fiduciary liability insurance, which it says is a “necessary lynchpin to protect fiduciaries against personal liability under ERISA.”
The company calls for four reforms to “restore fairness and balance to the fiduciary liability regulatory framework for retirement plan fiduciaries:”
- The Department of Labor should establish a uniform standard of care. “Ad-hoc negligence standards was not the intent of ERISA. To the contrary, ERISA was enacted to replace state-by-state regulation with a comprehensive regulatory framework.”
- Federal courts must apply consistent legal standards across all cases. “Plan sponsors deserve a consistent and predictable standard for weeding out the many copy-cat meritless cases in which new law firms are chasing a business model of suing defined contribution plans to leverage an easy settlement.”
- Courts should cap damages and limit attorney fees. “The damages model of $25 million to $200 million in most lawsuits is not congruent for a claim of simple negligence,” and “Attorney fees should be capped to stop the frivolous litigation that threatens to eliminate the availability for employer-subsidized employee benefit plans.”
- Recordkeepers and investment providers should accept responsibility if they do charge excessive fees and refund participants. “If there was any wrongdoing … it is the recordkeeper or investment manager that should bear the burden of reimbursing plan participants for alleged excessive fees — not the plan sponsor, fiduciaries or their fiduciary liability insurance carrier.”
Related:
Which 401k Plans Get Sued and Why?
Bringing Sunlight to Dark Corners of Safe Harbor IRA Fees
Schlichter Targets Pentegra MEP in Latest Excessive 401k Fee Lawsuit
Are 401k Fiduciaries Correctly Benchmarking Their Funds?
Danielle Andrus works as an editor for The Financial Planning Association® (FPA®). Over the past 15 years, she has worked in various capacities, including writing and editing. Andrus has worked for several notable publications and outlets and spent more than seven years as the executive managing editor at ALM Media, publisher of Investment Advisor magazine and ThinkAdvisor.com. Before that, she was online editor for Summit Professional Networks, where she oversaw newsletter development for four magazines, including Benefits Selling, Senior Market Advisor, Boomer Market Advisor, and Bank Advisor.
