As an insurance agent, you like know that any employer-sponsored retirement plan may present a liability exposure to lawsuits alleging excessive fees for service. Historically, these lawsuits have been filed against only the largest corporations. In the past three years, smaller retirement plans increasingly are being targeted.
Excessive fee litigation can impact publicly traded companies, privately held companies, universities, nonprofit organizations, financial institutions, and health care systems—regardless of size.
Under the Employment Retirement Income Security Act of 1974 (ERISA), fiduciaries of a retirement plan must act in the plan participants’ best interest. Yet, emerging excessive fee claims allege fiduciaries have breached their professional duties by inadequately monitoring and/or negotiating fees charged by plan service providers. This negligence can result in huge settlements and plaintiffs’ attorney fees.
Recently, this litigation has become more frequent and more severe. In fact. there were more than 100 excessive fee cases filed in federal court in 2020, a five-fold increase since 2019. As more plaintiffs’ law firms find success with these claims, an increasing number of copycat firms are filing similar litigation against smaller retirement plans. Courts are seeing an uptick in lawsuits against 403(b) plans, multiple employer plans, defined benefit pension plans, and even ERISA-exempt plans.
Defending and settling excessive fee claims is expensive. Some of the largest settlements cost tens of millions of dollars. Fiduciaries can take the following actions to manage this growing professional liability risk:
Conduct a competitive market analysis
Ensure the average cost per participant is not excessive by engaging in a formal Request for Proposal or similar process every three years to see how competitors are pricing.
Document fee and performance reviews
Confirm plan fees are reasonable based on industry benchmark by documenting the selection and retention of plan service providers.
Utilize third-party services
Seek third-party fiduciary professionals (investment, legal, accounting) to advise on their areas of expertise and add objective input.
Keep detailed records
Document meetings to provide proof that actions were taken prudently.
Ensure adequate Professional Liability Insurance
Without the proper protections in place, your small business clients operating as fiduciaries are at risk. Their best line of defense is a professional liability insurance policy from Coterie Insurance. Check out our Digital Appetite Guide to find out instantly which small businesses fall within our appetite—80 percent of them do!