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Retirement plan fiduciaries continue to face substantial exposure as a wave of excessive fee lawsuits continues.
Historically excessive fee suits targeted the largest organizations, with tens of thousands of participants and billions of dollars in plan assets. Lately, smaller retirement plans are facing this type of litigation.
A report co-authored by insurer Chubb and the Groom Law Group said, “it is clear that fiduciaries of smaller plans should no longer consider themselves to be immune from this kind of litigation risk.”
Groom Law Group reported that over 200 Employee Retirement Income Security Act (ERISA) class actions were filed in 2020, a record that represents an 80% increase over the number filed in 2019.
“As 2021 begins, this trend shows no sign of slowing down, with important developing issues related to fee and performance litigation for smaller retirement plans,” Groom Law Group article on Jan. 3, 2021, said.
Fiduciary Liability Premiums Jump
Fiduciary coverage is growing more difficult to purchase and policies are growing more restrictive.
According to a recent article by specialty insurer Amwins, “the key change in the fiduciary market is the increased level of policyholder retentions.”
Insurers are not only raising premiums but changing terms by increasing retentions or deductibles and adding limits to excessive fee or class action exposure.
Mitigating Excessive Fee Risks
There is no way to avoid excessive fee claims, but there are steps fiduciaries can take that will help to reduce risk.
Plan sponsors must adopt proactive risk management steps to address the threat.
Amwins says fiduciaries need a documented approach to ensuring plan fees are as low as possible. That approach should include the following three things among others:
- Engage in formal RFPs to reduce fees. Conduct a formal Request for Proposal with plan vendors at least every three years. Costs have gone down dramatically in the last five years.
- Document your fee and performance reviews. Review plan fees and investment performance quarterly and document the due diligence. Ensure those plan fees are reasonable based on industry benchmarks.
- Do not tie low fees to a percentage of assets. Ensure that all plan recordkeeping fees are on a low, flat-per-participant rate, instead of a percentage of assets.
Excessive fee lawsuits are expensive to defend, and expensive to settle, with some settlements costing tens of millions of dollars.
Chubb recommends fiduciaries obtain fiduciary liability insurance to help protect against potentially devastating personal exposure.
