It used to be reserved for major 401k plans with deep pockets, but fiduciary lawsuits against plan sponsors have come decidedly down-market. It seems anyone can now be sued for a variety of reasons, something a new whitepaper hopes to mitigate.
Released by Chubb and Groom Law Group, it explores the surge in ERISA litigation against fiduciaries of employer-sponsored retirement plans, regardless of size. It also specifically names the plan features that may make them a target of litigation, and the steps fiduciaries can take to potentially reduce exposure to excessive fee lawsuits.
According to the whitepaper, titled “The War on Retirement Fees: Is Anyone Safe?,” excessive fee claims are taking aim at a variety of plans, including 403(b) plans, multiple employer plans, defined benefit pension plans, and even Employment Retirement Security Act (ERISA)-exempt plans.
All types of plan sponsors are also being targeted, including publicly traded companies, privately held companies, universities, not-for-profit organizations, financial institutions, and healthcare systems.
In excessive fee claims, plan participants allege that plan fiduciaries have failed in their duty to ensure that plan recordkeeping and investment fees are reasonable. They also allege that plan investments have underperformed, costing participants millions of dollars in lost retirement benefits.
“The pace of ERISA class action filings is at an all-time high, and these cases are not only expensive to defend, but are also expensive to settle. Some of the largest settlements cost tens of millions of dollars,” Lars Golumbic, Principal of Groom Law Group, said in a statement. “It’s therefore critical for plan sponsor fiduciaries to understand their risks and take steps to potentially reduce their exposure.”
Actions that increase legal exposure
The authors emphasize that while difficult to predict and by no means a guarantee, the following characteristics (among others) make plans more susceptible to lawsuits.
- Accepting quoted recordkeeping rates without attempting to bargain up-front for lower fees, and/or failing to revalidate those fees via scheduled Requests for Proposals (RFPs) from recordkeepers.
- Paying recordkeeping fees as a percentage of assets under management rather than at a fixed per participant rate, and/or not switching to a fixed rate as plan assets grow.
- Failing to use the least expensive mutual fund share class available (e.g., institutional shares) as investment options.
- Failing to use separate accounts or collective investment trusts rather than mutual funds as investment options – but note that some complaints make the exact opposite allegation.
- Offering too few or too many investment options.
Steps to reduce exposure
According to the whitepaper, mitigation steps include:
- Establish, follow and document a robust and prudent process for retaining recordkeepers and determining their fees
- Establish, follow and document a robust and prudent process for selecting and regularly reviewing plan investments and investment expenses
- Retain qualified, independent experts to assist with fiduciary decisions
- Document the process and rationale behind any fiduciary decision, being particularly meticulous when deciding to use more expensive products or services and/or when going against expert advice.
With more than 20 years serving financial markets, John Sullivan is the former editor-in-chief of Investment Advisor magazine and retirement editor of ThinkAdvisor.com. Sullivan is also the former editor of Boomer Market Advisor and Bank Advisor magazines, and has a background in the insurance and investment industries in addition to his journalism roots.
