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Best Practices to Mitigate Retirement Plan Excessive Fee Risk

Excessive fee litigation cases in retirement plans have risen dramatically in frequency and severity and have put pressure on the Fiduciary Liability insurance market. These cases, which generally focus on fees that 401(k) and 403(b) plan participants pay for investment management or administration, have led to a considerable firming of the Fiduciary Liability marketplace, with decreases in capacity, significant increases in pricing and retentions and tightened underwriting criteria.

The cases generally allege that plan fiduciaries breached their fiduciary duties under the Employee Retirement Income Security Act of 1974 (ERISA) by overpaying for third-party plan administration or investment services. Plaintiffs typically contend that fees are excessive relative to performance.

Since 2005 excessive fee litigation has grown significantly with plaintiffs’ firms filing more than 250 lawsuits. In 2020 alone, there were at least 90 excessive fee cases in the US, four times the average of each of the previous three years. Canada has only seen 10-15 such cases, but multinationals continue to pay close attention to the trend. [1]

Typical allegations include:

Excessive fee litigation is expensive to defend and costly to settle – it is estimated that defendants only have about a 25% chance of winning motions to dismiss and will likely settle if they are unsuccessful. More than 40 cases have settled in excess of $10 million.[2] As a result, the cases are a growing threat to companies’ Fiduciary Liability insurance programs as the market continues to harden.[3]

This trend is expected to continue into 2021. However, risk managers at successful organizations are seizing the moment to adopt best practices to enhance their Fiduciary Liability outcomes and better understand their full risk profile. Here are best practices risk and benefit plan managers should consider to help mitigate risk and facilitate the Fiduciary Liability renewal process:


Risk Manager Best Practices:

  • Start early. To optimize renewal results, risk managers should start the renewal process early and be prepared to market their program among several carriers to generate competitive pricing, retention and terms.
  • Schedule underwriter meeting. Underwriters are frequently requiring a supplemental questionnaire on excessive fees during the renewal process. Consider scheduling a meeting with your underwriters that also includes your head of HR/Benefits to go over the questionnaire and all steps you are taking to mitigate the excessive fee litigation risk. This meeting will also give you a chance to answer any questions the underwriter may have in addition to those on the questionnaire.
  • Give fiduciary exposures as much attention as D&O and other liability programs. Fiduciary risks can be a serious exposure for people involved in insurance plan management – make sure you ask more questions about the quality of the insurance coverage and what level of limits is adequate.


Benefit Plan Manager Best Practices

  • Evaluate and be prepared to defend provider choices. The courts don’t say you need to choose the cheapest provider, but you do have to be able to give reasons for the providers you choose. In addition, new options are now available in the marketplace, including pooled employer 401(k) plans (PEPs) and outsourced chief investment officer (OCIO) relationships. With these new alternatives, you need to have evaluated whether an alternative is right for you—and have documented the evaluation process.
  • Take advantage of third-party services. Engage the services of third-party fiduciary professionals (investment, legal, accounting) who can advise you on the considerations and add an objective voice to the conversation.
  • Put an investment policy in place. Follow a well-documented decision-making process and build a record proving that the business has acted with “care, skill, prudence and diligence under the circumstances then prevailing,” as required by ERISA, including:[4]
    • Keep detailed records. Companies must keep detailed records and be able to produce meeting minutes if required. Document meetings, including discussions of considered changes and why changes were, or not, made. These records are the proof that you acted prudently and make it possible for you to defend your decision in court, even if in hindsight you may have made a different decision.
    • Monitor and review. Monitor fund performance and fees associated with third-party service providers such as recordkeepers and investment advisors. Review plan documents and make sure they are followed and go to market with an RFP when necessary.
    • Fiduciary training. Hold regular training and education sessions for fiduciaries.

When both risk and benefit managers do their due diligence, companies will have far fewer concerns about excessive fee litigation and other claims. Ultimately, companies’ fiduciary practices and risk approach will be an important accompaniment to any benefits management strategy. 

[1] Excessive Fee Litigation Upends the Fiduciary Liability Insurance Market

[2] Investment News. Fiduciary Insurance Costs

[3] A look at current state of ERISA class action litigation

[4] COVID-19 and 401(k) plan fiduciaries | John Hancock Retirement