Almost every employer sponsor- ing a retirement plan should to be mindful of potential fiduciaryliability under the Employee RetirementIncome Security Act of 1974 (ERISA).According to an article published bythe America Bar Association, betweenincreased regulatory scrutiny by theDepartment of Labor and private litigationbrought by the ever-expanding plaintiff’sbar, ERISA lawsuits are at an all-time high.
One of the most significant ERISA litigation trends is “excessive fee claims.”In a nutshell, these allege that a retirement plan’s fiduciaries allowed the planto overpay for recordkeeping and useexpensive and underperforming investments. These claims can cost millions ofdollars to defend, and settlements canreach tens of millions of dollars.
A financial services company thatsponsors a retirement plan may be sued,along with its executives, for excessivefee claims even when they don’t provide any professional services to the plan.This is because, as plan fiduciaries, theyhave a duty to ensure that plan fees andinvestments provided by third partiesare reasonable. Moreover, pursuant toERISA, plan fiduciaries may be personally liable for these losses and the plansdo not provide indemnification for them.
WHAT ABOUT SMALLER PLANS?
Although these claims were historically
filed against fiduciaries of large plans, the
last few years have seen an uptick in law-
suits against fiduciaries of smaller plans,
including plans well under $100 million
in assets. It’s apparent that fiduciaries of
smaller plans should no longer consider
themselves immune from litigation risk.
With a surge in litigation, it’s impor-
tant that all advisors, regardless of their
or their client’s plan size, understand the
recent trends pertaining to excessive fee
claims and the characteristics that may
make them more susceptible to litigation.
What can they do to protect themselves? Of course, plan fiduciaries shouldalways act with care and undivided loyalty to the plan and its participants. Andwhile there’s no foolproof way to avoidan excessive fee claim, there are a fewsteps that may help reduce exposure:
• Establish a prudent process for retaining recordkeepers and determiningtheir fees (e.g., conduct Requests forProposals and impose rate caps).
• Follow a robust process for selecting and reviewing investments (e.g.,consider index funds and pay attention to share classes).
•Retain qualified, independentexperts to assist with fiduciary processes. Although doing so won’tavoid fiduciary liability altogether,it may mitigate the exposure.
• Be cautious about providing professional services to your own plan fora fee.
• And finally, document the rationale
behind any fiduciary decision, espe-
cially when it goes against expert
advice or results in using more
expensive products or services.
Of course, a lynchpin of any loss mitigation effort is to obtain adequate fiduciaryliability insurance. A breach of fiduciaryduty in managing a company’s own sponsored retirement plan is precisely thetype of exposure that fiduciary liabilityinsurance is designed to protect against.(Note that Employee Benefit LiabilityEndorsements to General Liability policies generally do not provide coverage forbreaches of fiduciary duty claims. Suchcoverage can generally only be found infiduciary liability insurance policies.)
In light of the personal liability thatthreatens persons who breach theirfiduciary duties to a plan, plan fiduciaries who don’t have this coverage maybe placing their personal assets at risk inthe event of an excessive fee claim.
Even the most well-run plans can bethe target of an excessive fee claim. Allsized advisors, whether plan fiduciaries themselves or have clients who are,should familiarize themselves with thebasic allegations in these claims, consider adopting robust prudent proceduresto select and monitor recordkeepers andplan investments, and ensure appropriate insurance coverage is in place to helpmitigate and protect themselves againstpotentially devastating, personal exposure to excessive fee claims.
Alison L. Martin is senior vice president andFiduciary Product Manager for Chubb’s NorthAmerica Financial Lines division. She can bereached at: firstname.lastname@example.org.
WEALTH & RISK
By Alison L. Martin
Lawsuits Over Excess Fees on the Rise for
Employer-Sponsored Retirement Plans
Advisors should take care of their own plans and advise clients
of this growing problem.