Almost every employer sponsoring a retirement plan should to be mindful of potential fiduciary liability under the Employee Retirement Income Security Act of 1974 (ERISA).
According to an article published by the America Bar Association, between increased regulatory scrutiny by the Department of Labor and private litigation brought by the ever-expanding plaintiff’s bar, 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 plan to overpay for recordkeeping and use expensive and underperforming investments. These claims can cost millions of dollars to defend, and settlements can reach tens of millions of dollars.
A financial services company that sponsors a retirement plan may be sued, along with its executives, for excessive fee claims even when they don’t provide any professional services to the plan.
This is because, as plan fiduciaries, they have a duty to ensure that plan fees and investments provided by third parties are reasonable. Moreover, pursuant to ERISA, plan fiduciaries may be personally liable for these losses and the plans do 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 lawsuits 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 important 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 should always act with care and undivided loyalty to the plan and its participants. And while there’s no foolproof way to avoid an excessive fee claim, there are a few steps that may help reduce exposure:
• Establish a prudent process for retaining recordkeepers and determining their fees (e.g., conduct Requests for Proposals and impose rate caps).
• Follow a robust process for selecting and reviewing investments (e.g., consider index funds and pay attention to share classes).