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Fiduciary Rules and Practices

What Makes a Plan the Target of Excessive Fee Litigation?

Nearly every employer that sponsors a retirement plan should be concerned about potential liability for excessive fee claims, but it appears there are some plan characteristics that may make a plan more susceptible to being sued, according to a new white paper.   

Co-authored by Chubb and the Groom Law Group, “The War on Retirement Fees: Is Anyone Safe?” examines the recent history and trends relating to excessive fee claims, as well as plan features that may make it a target of litigation. The paper also discusses steps that fiduciaries can take to reduce exposure to excessive fee lawsuits. 

“Due to the presence of new plaintiffs’ firms in the mix and to constantly evolving theories of legal liability, it is difficult to predict which plans might attract unwanted attention,” according to the authors of the paper: Alison Martin, Senior Vice President and Fiduciary Product Manager for Chubb’s North America Financial Lines division, and Lars Golumbic, Principal at Groom Law Group and Chair of the firm’s litigation practice. 

One possible reason behind an apparent increase may be that plaintiffs’ law firms that were not previously known in the ERISA litigation space have started filing excessive fee claims. “Using plan information obtained from public filings, these new entrants are able to easily model their complaints in ‘cookie cutter’ fashion after those filed by more experienced firms that have honed their pleadings through years of experience in much bigger cases,” Martin and Golumbic write. 

And it doesn’t matter the type or size of the plan. Excessive fee claims are taking aim at all types, including 403(b) plans, multiple employer plans, defined benefit pension plans and even ERISA-exempt plans, they note. What’s more, the suits are targeting publicly traded companies, privately held companies, universities, not-for-profit organizations, financial institutions and health care systems. There also has been an uptick in suits involving plans with fewer than 1,000 participants and less than $100 million in assets, the authors note. 

“Excessive fee claims have historically been filed against only the largest organizations, specifically those large, publicly traded companies with multi-billion-dollar 401(k) retirement plans,” says Martin. “However, over the last several years, there has been a significant surge in litigation targeting a broader range of plans, despite evidence that average plan fees have been steadily declining.” 

Target Range

While not meant to imply that plans with the following characteristics are paying excessive fees or engaging in imprudent conduct, the authors offer as an example the areas that have been targeted in the past and may be targeted in the future: 

  • accepting quoted recordkeeping rates without attempting to bargain up-front for lower fees and/or failing to revalidate those fees; 
  • paying recordkeeping fees as a percentage of AUM rather than at a fixed per participant rate and/or not switching to a fixed rate as plan assets grow; 
  • failing to use the least expensive mutual fund share class available (e.g., institutional shares); 
  • failing to use separate accounts or CITs rather than mutual funds as investment options (the authors note that some complaints make the exact opposite allegation);  
  • offering too few or too many investment options, or options that are too risky or too conservative; 
  • failing to offer more index funds; 
  • offering investment options that are affiliated with the plan’s recordkeeper; and  
  • offering investment options that underperform net of expense relative to an index or benchmark.

One caveat they note is that these cases continue to evolve as the plaintiffs’ bar tests out new theories of liability, such as claims concerning the alleged misuse of plan participant data by recordkeepers.

Reducing Exposure

“The pace of ERISA class action filings is at an all-time high, and these cases are not only expensive to defend, but are also expensive to settle. Some of the largest settlements cost tens of millions of dollars,” notes Golumbic, who adds that, “It’s therefore critical for plan sponsor fiduciaries to understand their risks and take steps to potentially reduce their exposure.”

Among the steps the white paper suggests are:  

  • establishing, following and documenting a “robust and prudent process” for retaining recordkeepers and determining their fees, as well as for selecting and regularly reviewing plan investments and investment expenses;
  • retaining qualified, independent experts to assist with fiduciary decisions; and  
  • documenting the process and rationale behind any fiduciary decision, being “particularly meticulous” when deciding to use more expensive products or services, or when going against expert advice.