Wave of excessive fee claims against fiduciaries of retirement plans is growing
Certain plan features are common to those targeted for litigation.
The recent wave of excessive fee claims against fiduciaries of retirement plans is growing, and most employers that sponsor a retirement plan should be concerned about potential liability, according to a recent whitepaper, “The War on Retirement Plan Fees: Is Anyone Safe?” by Alison Martin from Chubb and Lars Golumbic from Groom Law Group.
An increasing number of smaller retirement plans have faced excessive fee litigation over the past few years, according to the report, including plans with fewer than 1,000 participants and less than $100 million in assets.
Lawsuits are cropping up against all types of plans, like 403(b) plans, multiple employer plans, defined benefit pension plans, and even ERISA-exempt plans, says the report. And against all types of plan sponsors, including public and privately held companies, universities, nonprofit organizations, financial institutions, and health care systems.
“Plan fiduciaries have a duty to ensure that plan record keeping and investment management fees are reasonable, and that plan investments perform well – In excessive fee claims, plan participants allege that plan fiduciaries failed on both counts and breached their fiduciary duties,” explains the report.
Excessive fee claims often allege that a plan is paying too much to its recordkeeper and investment manager. They also take aim at revenue sharing, claiming that it further bloats recordkeeping fees. And they often claim the plan is using investments that underperform their benchmarks.
Cases are not only expensive to defend, they are expensive to settle, with some of the largest settlements costing tens of millions of dollars, warns the report.
Emerging plaintiffs’ firms and constantly evolving theories of legal liability make it difficult to predict which plans might attract unwanted attention, although certain plan features are common to those targeted for litigation, says the report:.
- accepting quoted recordkeeping rates without attempting to bargain for lower fees and/or failing to revalidate those fees
- paying recordkeeping fees as a percentage of assets under management
- failing to use the least expensive mutual fund share class available as investment options
- failing to use separate accounts or collective investment trusts rather than mutual funds as investment options
The authors caution plan fiduciaries when choosing investment options, like offering too few or too many investment options, offering investment options that are too risky or too conservative, failing to offer more index funds, and offering investment options that underperform net of expense relative to an index or benchmark, amongst others.
There are steps fiduciaries can take that may reduce exposure to excessive fee claims, according to the report. For example, follow a process for retaining recordkeepers and determining their fees, and for selecting and regularly reviewing plan investments and investment expenses.
Fiduciaries can also retain independent experts to assist with fiduciary decisions, rather than rely on benchmarks provided by service providers, says the report. Just as importantly, they should document the process and rationale behind any fiduciary decision.
Plan fiduciaries should obtain comprehensive fiduciary liability insurance to help mitigate and protect against potentially devastating, personal exposure to excessive fee claims, says the report.
A Center for Retirement Research report, “401(k) Lawsuits: What are the Causes and Consequences?” discusses potential effects of the uptick in litigation against 401(k) plans. Two major trends that have coincided with the lawsuits are a rise in the use of low-cost index funds, which are perceived as less vulnerable to litigation, and a downward trend in investment and administrative fees, according to the report by George Mellman and Geoffrey Sanzenbacher.
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