Employers that sponsor retirement plans should be concerned about potential liability for excessive fee claims. The fiduciaries of a retirement plan have a duty to ensure that plan investment management and recordkeeping fees are reasonable and that plan investments perform well. In excessive fee claims, plan participants allege that plan fiduciaries failed on both counts and breached their fiduciary duties defined under ERISA which include holding the fiduciaries personally liable for these amounts. Historically, excess fee claims were filed only against the largest organizations. Plaintiffs are now, however, targeting plans of all sizes, including plans with fewer than 1,000 participants and plans with assets as low as only $4.5 million.
These claims allege that a plan is paying too much to its recordkeeper and investment manager and often target “revenue sharing”. Revenue sharing occurs when a mutual fund manager pays or “shares” part of its mutual fund’s fees with the recordkeeper for purposes that are unrelated to the management of the mutual fund, such as a marketing fee. These claims also allege the fiduciary selected investments for the plan that underperform their benchmarks. Excess fee claims often involve lengthy legal discovery, which can include the review and production of thousands of documents as well as taking the testimony of numerous plan fiduciaries and company employees. In addition, both sides retain expert witnesses which makes for an expensive and time-consuming process costing hundreds of thousands or even millions of dollars in defense costs. These cases are not only expensive to defend, but they are also expensive to settle, with some of the largest settlements costing tens of millions of dollars.
Some fiduciaries mistakenly believe that they can entirely avoid this liability by hiring professionals to handle all of these decisions. Under ERISA Section 409, fiduciaries are personally liable for a breach of fiduciary duty (for decision-making both retained and delegated), including claims that they allowed the plan and its participants to pay excessive fees and use expensive and underperforming investments.
Fiduciary Liability insurance provides insurance protection for this exposure plan fiduciaries face against claims of breach of fiduciary duty or mismanagement of the plan. In light of this personal liability, plan fiduciaries who do not have fiduciary liability insurance may be placing their personal assets at risk in the event of an excessive fee claim.
In response to this increased litigation, Fiduciary Liability insurer carriers are re-evaluating their books of business by raising insurance premiums, increasing policyholder retentions and adding sub-limits for excessive fee claim exposure. In addition to these changes, underwriters are now requiring supplemental applications regarding excessive fee exposure to evaluate each plan’s approach to recordkeeping and investment expenses.
With this surge in litigation and a more challenging Fiduciary Liability Insurance marketplace, it’s important that all fiduciaries, regardless of plan size, understand the following steps they can take to help reduce exposure to excessive fee claims:
- Obtain Competitive Quotes: Conduct a competitive evaluation of plan vendors every three years. Recordkeeping and investment fees have significantly reduced in the last five years.
- Evaluate the Fee Calculation Methodology: Plan Recordkeeping Fees are often charged as a % of assets under management. This can often be negotiated to a flat fee per person that will result in a lower fee unless your plan has multiple employee accounts with small asset values.
- Offer Low-cost Index Funds: Ensure that your plan includes low-cost index funds.
- Review Investment Options: Review and potentially eliminate options that underperform net of expense relative to an index or benchmark. Evaluate the life-cycle/target-date funds that are affiliated with the plan’s recordkeeper and consider a different provider.
- Review Revenue Sharing Expenses: Review if there is an option to utilize Institutional Share Class which have lower 12b-1 revenue sharing expenses.
- Document the Plan Fee and Your Performance Reviews: Review plan fees and investment performance regularly and document your due diligence process. Ensure that plan fees are reasonable based on industry benchmark and involve an outside expert in this process.
Fiduciaries of retirement plans of all sizes should take steps to review how they monitor recordkeeper fees and select plan investments. Plan fiduciaries should obtain Fiduciary Liability Insurance from an experienced broker to help mitigate and protect themselves against the potentially devastating personal exposure to excessive fee claims. Your Graham Company Service Team can assist you with questions regarding Fiduciary Liability Insurance.