Fiduciary Liability Insurance Rates Skyrocket

A significant byproduct of these lawsuits? Fiduciary liability insurance rates have skyrocketed.

In its Hughes v. Northwestern amicus brief, the U.S. Chamber writes, “The massive and unpredictable risks of ERISA class-action litigation have ‘wreaked havoc on the market for fiduciary liability insurance,’ pushing fiduciary insurers ‘to raise insurance premiums, increase policyholder deductibles, and restrict exposure with reduced insurance limits.’ The burden is falling on plan sponsors, not insurers.”

A 2021 MarshMcLennan Agency report found there has been an 80% increase in ERISA-related litigation, which is driving rates. Fiduciary liability insurance carriers have responded by increasing policy rates by 15%-20% and implementing stricter underwriting requirements or even outright denying renewals.

While Sheaks notes the number of 401(k) plans overall is increasing—a good thing, she says, because Americans need access to retirement plans—the flip side is “it’s almost like this unlimited untapped resource for this cottage industry to go after. We have over 600,000 401k plans in the U.S. I don’t know of any other plaintiff-side target that big. That’s the frightening part,” Sheaks said.

“This has really upended the fiduciary liability insurance industry,” Sheaks added, noting there used to be very low deductibles but not anymore. For a lot of these settlements, it’s not just the insurer that’s paying; it’s the employer as well because the deductibles are so high.

“If I’m an employer and I just had to pay $35 million in a settlement for the 401k, that money has to come out of somewhere,” Sheaks said. “And we’ll see employers maybe reconsidering, ‘Well, maybe I won’t subsidize the fees. Maybe I’ll have less of a match. Maybe I take it out of wages. Or maybe I just don’t have a plan altogether.’”

These are the type of outcomes the Chamber is fighting against.

Focus on Educating Courts

As a big part of its strategy to avoid those outcomes and fight the wave of plaintiff suits, Sheaks said the U.S. Chamber of Commerce is seeking to better educate the courts on ERISA litigation.

“At the District Court level, these judges are being thrown everything. The topics are immense. For some reason, many people think that ERISA cases are really just too complex to dismiss early on, so we decided we needed to educate the courts about ERISA,” Sheaks said. “We’re really trying to get past all the smoke and mirrors that the plaintiffs are creating.”

That smoke and mirrors she refers to? The Chamber said in the Hughes v. Northwwestern amicus brief that the lawsuits generally compare the fees or performance of particular investments against the fees or performance of one or more of the thousands of alternative investments available in the market. Or they compare the fees paid to a plan’s recordkeeper to the recordkeeping fees paid by a different plan or reported in a median survey of some subset of plans. Then they ask courts to infer from those outcomes that plan fiduciaries’ decision-making process must have been inadequate, and they seek millions of dollars in “losses” from the individuals serving as fiduciaries.

“They’ll cherry-pick investments,” Sheaks said of the plaintiff suits. “There are hundreds of thousands of investments out there. There’s always something better, and there’s always something worse. What we’re trying to do is really break it down and educate the courts on just that. You can dismiss the pleading standards.”

In most ERISA cases, Euclid Fiduciary’s Aronowitz notes in his whitepaper, plaintiff attorneys pull fee data from Form 5500s, which they know includes transaction fees beyond plan recordkeeping. Sheaks agrees.

“They’ll go to the Form 5500, look for the service provider and look for the fees and then divide that number by the number of participants, and say ‘Oh, that’s the fee.’ It’s really high,” Sheaks said. “And they pick these random numbers with no basis of what an average fee should be. It used to be $65, then it was $50. Now it’s randomly $35.”

The Euclid whitepaper points out that in Hughes v. Northwestern, the Supreme Court held that all excessive fee claims based on circumstantial evidence must be subjected to context-based scrutiny in order to survive as a plausible lawsuit. “The only credible way to meet this context-based plausibility standard is if the fees are egregious based on a reliable, third-party benchmark. Fees within a reasonable range of established benchmarks—not plaintiff-manufactured benchmarks—are not plausible under the Supreme Court pleadings standard,” the whitepaper states.

“In a claim of excessive fees, the only context that makes sense is if the fees are actually excessive at the threshold stage of the case,” the whitepaper continues. “Discovery and the gateway to settlements should not be allowed for plaintiffs who have filed illegitimate and unsupported claims of excess fees.”

Sheaks said she thinks once the courts start looking at this in that context-specific light, “you will see a lot more [cases] being dismissed at that motion-to-dismiss level” rather than going on for summary judgment or settlement.

A recent post from ERISA and employee benefits law firm Trucker Huss explains that a motion to dismiss challenges the quality of a plaintiff’s allegations at the beginning of a case before any discovery is taken and seeks to have the plaintiff’s claims dismissed on grounds that they are legally insufficient. If the plaintiff defeats that motion, it does not mean their case will be successful, but only that they are permitted to proceed to discovery to try to obtain evidence that supports their claims.

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