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Fiduciary Liability renewals were stable in 2018, and this coverage line continues to be the least affected in Management Liability. There have been sizable fiduciary liability settlements in the past 24 months that are noteworthy. We anticipate a minor impact in the market condition as markets begin to adjust for loss trends across all management liability lines.
401(k) Litigation Trends
In the past two years, we saw an increase in the number of 401(k) lawsuits filed. 51 cases were filed in 2017, and 56 cases were filed in 2016. By comparison, only 38 cases were filed in 2015 and 12 cases in 2014. This is the highest level of filings since the financial crisis in 2008-2009.1 The increase in 401(k) lawsuits is primarily due to the persistence of fee and expense litigation, which has replaced employer stock drop claims in predominance.
Historically, the majority of fee and expense lawsuits were filed against large defined contribution plans; however in 2017-2018, the focus shifted to Proprietary Fund Cases and University Fee Cases.
Proprietary Fund Cases: A variation of excessive fee cases, lawsuits are brought by plan participants against plan sponsors who are financial institutions. The allegations are similar to the plan sponsor cases, but also allege that the plan sponsors utilized proprietary or affiliated funds or services to increase the financial institution’s revenue. Plaintiffs claim this self-serving action is a breach of fiduciary duty and/or an ERISA prohibited transaction. Significant Proprietary Fund settlements in 2018 include BB&T $24M, Deutsche Bank $21.9M and Allianz $12M.
University Fee Cases: Since 2016, more than 20 class action lawsuits were filed against University sponsors of 403(b) defined contribution plans. The allegation is the university plan fiduciaries breached their ERISA duties by offering a large number of complex investment options that were duplicative, expensive and poorly performing. To date, 5 cases have been dismissed and 2 cases settled (University of Chicago—$6.5M; Duke University—undisclosed). The initial pace of filings slowed considerably in 2018, while plaintiff firms await outcomes of pending cases. We anticipate 2019 to be a defining year with several trial dates scheduled.
In contrast to 401(k) lawsuit trends, the top ten ERISA class action settlements in 2018 were significantly lower in value than the past four years. They were also a widely varied in allegations. Seven of the top ten settlements in 2017 were church plan challenges in which it is alleged the plan is not a “church plan” and consequently significantly underfunded if funding is calculated by ERISA standards. By comparison, in 2018 only three of the top ten settlements were church plan challenges. Three settlements were fee and expense claims, one related to employer securities held in the plan and the remainder plan benefit or investment related.
It is important to note that Fiduciary Liability insurance policies typically do not cover the “benefits due” portion of settlements/judgements, which comprises the majority of the settlement figure for church plan challenges and benefit due cases. This obligation remains with the plan sponsor. Fiduciary Liability insurance, however, may provide for defense costs and other expenses associated with these claims.
The U.S. Fifth Circuit Court of Appeals vacated the Department of Labor’s proposed expansion of the definition of Fiduciary. The DOL is considering regulatory options and response is expected by September 2019.
The future of the Affordable Care Act is uncertain heading into 2019, given challenges by the Trump Administration and certain states. We expect to see further developments in the coming year.
The claimant of significance for ERISA cases in the Private/Not-For-Profit segment continues to be the Department of Labor/Employee Benefit Security Administration (EBSA). The stated areas in which EBSA will focus its efforts in 2019 are:
EBSA National Enforcement Priorities2:
- Major Case Enforcement – EBSA is strategically focusing investigative resources on professional fiduciaries and service providers with responsibility for large amounts of plan assets and the administration of large amounts of plan benefits.
- Employee Contributions Initiative – EBSA has designated the investigation of delinquent employee contributions, a previous national project, as a national enforcement priority.
EBSA National Enforcement Projects in which field offices are to place particular investigative emphasis include:
- Employee Stock Ownership Plans (ESOPs) - The ESOP Project is designed to identify and correct violations of ERISA in connection with ESOPs. In addition, EBSA reviews the continued operation of ESOPs and the duty of fiduciaries to monitor and control wasteful corporate activities and ensure that participants receive the specific benefits due to them under the plan.
- Health Enforcement Initiatives- EBSA is focusing its efforts on returning money to plans and their participants adversely affected by improper administrative practices or the mishandling of plan funds.
2019 Market Forecast
Given the long-term profitability of the Fiduciary Liability product line, we expect to see flat to modest increases in renewal premiums (0-5%) in 2019 and stable coverage. Companies with heightened exposures, such as a large concentration of company stock in defined contribution plans, proprietary fund investment options and ESOPs, may see adjustments to retentions and/or increased premium. Certain types of sponsors, such as Higher Education or organizations with Church plans, may encounter changes in carrier’s appetites, including but not limited to higher premiums, increased retentions and restrictive endorsements. As always, stressed risks (poor claims history, underfunded plans and plan sponsors in financial distress) should prepare for increases larger than those previously mentioned, with potentially restrictive exclusions also included.
About the Author: Rebecca Dauparas is an Area Vice President in Gallagher’s Management Liability Practice. This group focuses on providing insurance and risk management solutions related to executive and management liability issues. For additional information, please contact Ms. Dauparas at Rebecca_Dauparas@ajg.com, call your local Gallagher representative or visit www.ajg.com/mlp.
1 Center for Retirement Research at Boston College – 401(k) Lawsuits: What are the Causes and Consequences? May 2018, http://crr.bc.edu/wp-content/uploads/2018/04/IB_18-8.pdf
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