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).
• Retain qualified, independent experts to assist with fiduciary processes. Although doing so won’t avoid fiduciary liability altogether, it may mitigate the exposure.
• Be cautious about providing professional services to your own plan for a fee.
• And finally, document the rationale behind any fiduciary decision, especially 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 fiduciary liability insurance.
A breach of fiduciary duty in managing a company’s own sponsored retirement plan is precisely the type of exposure that fiduciary liability insurance is designed to protect against.
(Note that Employee Benefit Liability Endorsements to General Liability policies generally do not provide coverage for breaches of fiduciary duty claims. Such coverage can generally only be found in fiduciary liability insurance policies.)
In light of the personal liability that threatens persons who breach their fiduciary duties to a plan, plan fiduciaries who don’t have this coverage may be placing their personal assets at risk in the event of an excessive fee claim.
Even the most well-run plans can be the target of an excessive fee claim.
All sized advisors, whether plan fiduciaries themselves or have clients who are, should familiarize themselves with the basic allegations in these claims, consider adopting robust prudent procedures to select and monitor recordkeepers and plan investments, and ensure appropriate insurance coverage is in place to help mitigate and protect themselves against potentially devastating, personal exposure to excessive fee claims.
Alison L. Martin is senior vice president and Fiduciary Product Manager for Chubb’s North America Financial Lines division. She can be reached at: email@example.com.