Initially, claims targeted only very large organizations with thousands of participants and billions in assets. However, recent claims have been filed against much smaller plans.⁴ The rise in excessive fee claims has been driven by new action on the part of plaintiff law firms previously unknown in the ERISA litigation space. Using plan information obtained from public filings, firms new to the space often model complaints after those filed by more knowledgeable law firms that have honed pleadings through years of experience on much larger cases. While nearly 200 excessive fee lawsuits have been filed in federal court since 2015, approximately 90 of them were filed in 2020 alone.¹ And, to the frustration of businesses and insurers alike, only 25% of all cases have been decided in favor of the defense.²

WHAT IS EXCESSIVE FEE LITIGATION?

When an excessive fee claim is filed, plan participants allege that plan fiduciaries failed in their duty to maintain appropriate documentation, pay only reasonable management fees, and ensure optimal investment performance. Claims can also take aim at revenue sharing by asserting that it further exaggerates plan fees.¹ Specifically, these lawsuits argue that plan administrative and investment fees are too high, and that investment performance falling below the plaintiff’s arbitrary benchmark should be considered negligence and result in the payment of huge indemnity settlements and exorbitant plaintiff’s attorney fees.¹ It’s also commonly argued that cheaper recordkeeper fees are available elsewhere in the marketplace, and paying any higher amount falls within a damages model from which plaintiff firms receive a 33% share.¹

Such claims aren’t only expensive to defend, they’re also expensive to settle, with some of the largest settlements costing tens of millions of dollars. For example, a cookie-cutter excessive fee lawsuit filed against Anthem alleged that the company chose unreasonably expensive share classes, overpaid the recordkeeper, and inappropriately offered employees a money market fund rather than another stable value fund. In the end, Anthem settled the claim for $23.65 million. Unfortunately, the Anthem case is like many others because most insurance companies are forced to settle in order to avoid bad faith failure.² To date, fiduciary liability carriers have paid an estimated $1B+ in settlements and more than $250 million in attorneys’ fees to a growing group of plaintiff firms looking to capitalize on outsized fee awards.²

WHO IS IMPACTED BY EXCESSIVE FEE LITIGATION?

Excessive fee litigation can impact a wide variety of organizations including publicly traded companies, privately held companies, universities, non-profit organizations, financial institutions, and healthcare systems that maintain 403(b)s, multiple employer plans, defined benefit pension plans, or ERISA-exempt plans. For example, on February 1st, 2021, a lawsuit was filed against Heartland Coca-Cola Bottling Company, LLC, a participant in the Coca-Cola Bottlers’ Association 401(k) Retirement Savings Plan - a multiple employer plan covering approximately 19,000 participants and holding around $800M in assets.⁶

However, in recent years, there has also been an uptick in lawsuits involving smaller plans, including those with fewer than 1,000 participants and less than $100M in assets.³ For instance, in 2016, a lawsuit was brought against Checksmart, involving a plan with $25M in assets as well as Lamettry’s Collision Inc., where the plan held assets of just more than $9M. Later, in 2017, Nationwide Life Insurance Co. was targeted based on a plan with a mere 27 participants and assets of only $1.1M. While smaller plans or companies clearly aren’t the sole target of plaintiff firms, such evidence confirms that no plan is too small to sue. In fact, smaller targets can often be more inviting because a plan’s fiduciary duties under ERISA aren’t scalable. The same duties and obligations apply to both small and large plans alike.⁵

LOOKING AHEAD

The requirements for filing a lawsuit with sky-high damages attached is very low, and exposes all plan sponsors to the potential threat of expensive litigation. Even the most well-run plans can become the target of an excessive fee claim.³ It’s hoped that the Department of Labor will step in at some point to develop a fairer standard, and that federal courts will begin applying more rigorous standards in order to eliminate frivolous lawsuits.¹ However, as the situation continues to play out, organizations offering retirement plans must engage in thorough risk management activities when it comes to evaluating plan recordkeeping and investment fees. While there’s no foolproof way to avoid an excessive fee claim, partnering with expert consultants to help guide fiduciary processes may help mitigate exposure.³ Insureds should also strive to appropriately manage fees and accurately document plan decision-making processes, especially when any decision is made against expert advice or results in using more expensive products or services.³

BOTTOM LINE

Businesses sponsoring retirement plans are finding that it’s much harder to obtain adequate fiduciary liability insurance due to the rise in excessive fee lawsuits. Brokers are reporting recent deductibles reaching $1M and larger plans are seeing retentions near $5M.² Unfortunately, fiduciary insurers have had no choice but to raise premiums, increase policyholder deductibles, and lessen exposure using reduced insurance limits and/or increases in excess fee litigation deductibles.¹

Adequate fiduciary liability coverage is a foundational component of any organization’s risk management effort because a breach of fiduciary duties can have devastating consequences for the fiduciary’s personal assets in the event of an excessive fee claim.³ As the fiduciary liability market continues to evolve, agents should proactively discuss the potential for higher rates and deductibles with insureds and consider partnering with wholesale brokers experienced in navigating the fiduciary liability space. Contact your CRC Group producer to learn more about how we can help your clients approach the changing Fiduciary Liability marketplace.

Contributor

• Ed Antonucci is a Professional Lines Broker and Director with CRC’s Chicago, IL where he focuses on E&O and D&O. Ed is also an active member of the ExecPro Practice Advisory Committee.

ENDNOTES

1. New Euclid Specialty Whitepaper – Exposing Excessive Fee Litigation Against America's Defined Contribution Plans, InsuranceNewsNet.com, December 2, 2020. https://insurancenewsnet.com/oarticle/new-euclid-specialty-whitepaper- exposing-excessive-fee-litigation-against-americas-defined-contribution-plans
2. Plan Sponsors Face Increasing Risk of Excessive-fee Litigation, BenefitsPro, December 18, 2020. https://www.benefitspro.com/2020/12/18/plan-sponsors-face-increasing-risk-of-excessive-fee-litigation/
3. Lawsuits Over Excess Retirement Plan Fees on the Rise, ThinkAdvisor, June 25, 2020. https://www.thinkadvisor.com/2020/06/25/lawsuits-over-excess-retirement-plan-fees-on-the-rise/
4. Fiduciaries and Excessive Fee Litigation, Schneider Downs, July 15, 2020. https://www.schneiderdowns.com/our-thoughts-on/fiduciaries-excessive-fee-litigation
5. Excessive-fee Litigation in Retirement Plan Market Moving Downstream, Investment News, November 22, 2017. https://www.investmentnews.com/excessive-fee-litigation-in-retirement-plan-market-moving-downstream-72761
6. Another MEP Targeted in Excessive Fee Suit, National Association of Plan Advisors, February 8, 2021. https://www.napa-net.org/news-info/daily-news/another-mep-targeted-excessive-fee-suit