Reducing the risk of excessive fee litigation in the changing fiduciary insurance market

Q&A with Dave Weller, EVP and Professional Lines Specialist, Amwins Brokerage; and Daniel Aronowitz, Managing Principal, Euclid Specialty Managers.

(Photo: Shutterstock)

The big trend in 401(k) lawsuits in recent years is participants suing plan sponsors and providers over excessive fees. ERISA requires that fiduciaries of a plan research and choose carefully among providers to ensure fees charged aren’t unreasonable or excessive and document that process. Besides following best practices and due diligence in that regard, plan sponsors are also considering fiduciary insurance as a way to mitigate risk.

For more perspective on plan sponsor liability and risk, as well as to learn more about the part fiduciary insurance plays, we turned to Dave Weller, EVP and Professional Lines specialist with Amwins Brokerage and Daniel Aronowitz, Managing Principal, Euclid Specialty Managers to learn more.

BenefitsPRO: Why are plan sponsors facing increased fiduciary risk exposure? What’s happening to cause this increased risk? 

Dave Weller and Daniel Aronowitz: The pace of excessive fee lawsuits continues to increase, with nearly 100 cases filed last year, and we are on track for even more this year.  These lawsuits allege that plan fiduciaries have failed in their fiduciary responsibilities to plan participants to control plan recordkeeping and investment expenses, or prudently monitor the performance of plan investments.  Most of these lawsuits survive a motion to dismiss, which leads to significant pressure to settle because of high litigation costs and the threat of high damages.  Plaintiff firms have started targeting smaller plans, so now all plan sponsors face significant fiduciary risk with respect to plan fees.

How might ERISA lawsuits and excessive fee lawsuits impact the fiduciary insurance market? And why do sponsors need to prioritize mitigating these excessive fees?

With over one billion dollars in settlements and several hundred million paid in attorney fees to law firms filing these cases, fiduciary liability insurers have made substantial changes in fiduciary renewals.  Fiduciary carriers are conducting more underwriting diligence for renewals, including studying the fee transparency reports from recordkeepers and analyzing a plan’s recordkeeping and investment fees and performance.

Fiduciary carriers have reduced the limits they are willing to offer to plans, and most plan sponsor will see higher premiums and retentions, likely including even higher retentions for class action or excessive fee lawsuits.

Some plan sponsors will have trouble finding sufficient capacity to cover the high exposure of excessive fee litigation.  The most dramatic example of the change in the fiduciary market is a leading fiduciary insurer now requires a $15 million excessive fee retention for large plans.

Many plan sponsors rely exclusively on fiduciary insurance as a risk management plan to fund and absorb losses. What are the proactive steps plan sponsors can take to avoid excessive fees?

Excessive fee litigation has established a higher fiduciary standard for controlling plan expenses, and all plan sponsors must take affirmative steps to reduce their fiduciary risk profile.  Most advisers recommend that plan sponsors follow a good investment policy and to carefully document the reasons for their decisions.

But that is not enough to prevent your plan from being sued.  Here are some guides to determine whether your plan has a high risk of excessive fee litigation:

  1. if your plan is in retail share class of investment options when lower-cost institutional share classes are available;
  2. if your plan has an active suite of target-date investments;
  3. if your plan has recordkeeping fees on a percentage of asset basis with uncapped revenue sharing.

We recommend that plan sponsors take four affirmative steps to address each of these three risks factors:

  1. Ensure that your recordkeeping fee is charged on a low, flat-fee per participant, and eliminate or cap all revenue sharing from investment options.  Better yet, plan sponsors should consider paying the recordkeeping fee to take this risk factor off the table.
  2. Initiate an RFP every three years to bid out your recordkeeping to ensure the lowest possible plan administrative fees.
  3. Ensure that every investment option in the plan is the lowest possible institutional share class for every investment option.
  4. Make sure that your plan has low-fee index options for every investment category, and move to index target-date funds at the lowest possible fee for participants.

Any additional advice you’d share with plan sponsors?

The litigation risk demonstrates plan fiduciaries must take affirmative steps to control plan expenses.  Given the heightened risk environment, it would be wise for plan sponsors to hire an experienced consultant to review plan fees and investment performance annually. Even if your plan committee has diligently addressed and documented a thoughtful process to reduce plan fees, you may still need an expert to adequately mitigate plan risks and reduce fees.

Finally, review your fiduciary liability program carefully to ensure key coverage is not being removed or limited.

READ MORE:

Recommended Stories