Author: Rebecca Dauparas
Fiduciary Liability Litigation Trends
Over the past fifteen years, most significant 401(k) lawsuits filed have been fee and expense claims. Since these cases emerged in 2006, plaintiff firms filed an average of 20 lawsuits annually. In 2019, the number of cases filed doubled to 40 and exploded in 2020 with over 90 lawsuits filed. Fiduciary Liability insurance carriers have paid over an estimated $1 billion in settlements and over $250 million in attorney fees relating to fee and expense claims in the last 15 years.2 On a per claim basis, settlements have historically ranged from $800,000 to $62 million not including defense costs. Judgments have ranged from $80,000 to $36.9 million plus defense costs.
Large defined contribution plans sponsored by publicly traded companies with thousands of participants and billions in plan assets were initially the target of fee and expense lawsuits. Beginning in 2016, the focus shifted to Proprietary Fund (Financial Institution) and University Fee cases. The scope has since broadened further to include plans of all sizes and types, including multiple employer plans, multiemployer plans and defined benefit plans. Additionally, all types of plan sponsors including publicly traded, privately held and not-for-profit entities are now subject to these cases. In 2021, no plan is immune to this exposure.
The increase in the number of cases is due to an increase in plaintiff firms aggressively pursuing fee and expense claims. The availability of public data on Employee Retirement Income Security Act of 1974 (ERISA) plans makes it easy for plaintiff firms to identify lawsuit targets while also enhancing the legitimacy of their complaint. Plaintiff firms have created template-style filings alleging a wide variety of common allegations, increasing the ease in filing and probability of applicability to the defendant. If the suit gets past initial dismissal, discovery and defense costs can range from $250,000 to millions.
Based on recent litigation, plaintiffs have targeted plans with the following characteristics:
- Infrequent RFPs for recordkeeper services, lack of monitoring and/or negotiation of rates
- Recordkeeping fees based on a percentage of assets under management versus a fixed per participant rate
- Investment options that are affiliated with the plan's recordkeeper (i.e., target date, life style funds)
- Investment options that underperform relative to an index or benchmark
- Failing to negotiate the lowest mutual fund share class available (i.e., institutional vs. retail class) for investment options
- Failing to demonstrate a thorough due diligence process followed to review vendor fees
- Failing to use separate accounts or collective investment trusts instead of mutual funds as investment options
- Offering too few index funds as investment options
- Investment options that are considered too risky or too conservative
- Offering too few or too many investment options to participants
There are undoubtedly valid reasons plan fiduciaries select vendors, plan structures and investment lineups. While there is no foolproof solution to prevent a fee and expense lawsuit, critical to their defense is a thorough and well-documented process for plan fiduciaries in making these decisions.
Emerging Plan Trends
The Setting Every Community Up for Retirement (SECURE) Act allows for the creation of Pooled Employer Plans (PEPs) beginning in 2021. The plan is similar to an open multiple employer plan (MEP) allowing employers and allows employers to band together and pool their assets, creating the opportunity for broader investment options and lower costs for small and midsize businesses.
The claimant of significance for ERISA cases in the private/not-for-profit segment continues to be the Department of Labor and Employee Benefit Security Administration (EBSA).
In fiscal year 2020, EBSA recovered over $3.1 billion for direct payment to plans, participants and beneficiaries.1 More than 1,120 civil investigations were closed by EBSA during 2020, with 754 or 67% of these cases resulting in losses restored to employee benefit plans or other corrective actions. Recoveries on behalf of terminated vested participants in defined benefit plans represented $1.48 billion of recovered amounts. EBSA typically pursues voluntary compliance as the preferred means to correct violations and restore losses to employee benefit plans. In cases where voluntary compliance and correction efforts failed or are not appropriate, EBSA will refer the case to the Solicitor of Labor to initiate litigation. In 2020, 82 cases were referred for litigation. During fiscal year 2020, EBSA closed 230 criminal investigations; 59 or 26% were closed with guilty pleas or convictions. Additionally, 70 individuals were indicted, including plan officers, corporate officers and service providers, for offenses related to employee benefit plans. Most fiduciary liability policies, purchased monoline or in a package, offer a sublimit for fees, including fines and penalties, defense, and compliance costs associated with the Voluntary Fiduciary Correction Program (VFCP).
2021 Fiduciary Liability Insurance Market Forecast
Given the current adverse claim trends in the Fiduciary Liability product line, we expect to see 15%–30% increases in renewal premiums in addition to changes to terms and conditions. Carriers are reducing limits, increasing retentions and reducing potential exposure to fee and expense claims. Actions include adding a sublimit, separate retention, coinsurance and exclusionary wording for fee and expense claims.
Certain types of sponsors such as higher education, church plans and financial institutions with proprietary fund investments in their 401(k) may encounter drastic changes in carrier's appetites and possible declination. As always, stressed risks (poor claims history, underfunded plans and plan sponsors in financial distress) should prepare for increases larger than previously mentioned, with potentially restrictive exclusions also included.
Please note, a client's risk profile is the primary variable dictating renewal outcomes. Loss experience, industry, location and individual account nuances will also have a significant impact on these renewals. Now more than ever, it's important to start renewals as soon as possible, and work with your Gallagher team to deliver a comprehensive and professional submission to underwriters.
1 Seyfarth Shaw LLP, 17th Annual Workplace Class Action Litigation Report
2 Euclid Specialty, Exposing Excessive Fee Litigation Against America's Defined Contribution Plans, December 2020