Business DescriptorBusiness Descriptor
The War on Retirement Plan Fees:
Is Anyone Safe?
Authored by: Alison L. Martin and Lars C. Golumbic
2
Almost every employer that sponsors a
retirement plan should be concerned about
potential liability for a type of exposure
known as excessive fee claims. Historically
led against only the largest organizations,
an increasing number of smaller retirement
plans have faced excessive fee litigation
over the past couple of years. With this
surge in litigation, it’s important that
all duciaries, regardless of plan size,
understand the history and recent trends
relating to excessive fee claims, the plan
features that may make it a target of
litigation, and steps duciaries can take
that may reduce exposure to excessive fee
claims.
The Evolution of Excessive Fee Claims
Plan duciaries have a duty to ensure
that plan recordkeeping and investment
management fees are reasonable, and
that plan investments perform well. In
excessive fee claims, plan participants
allege that plan duciaries failed on both
counts and breached their duciary
duties. Specically, they allege that a plan
is paying too much to its recordkeeper
and investment manager. They also
take aim at something called “revenue
sharing,” claiming that revenue sharing
bloats the recordkeeping fees even more.
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. Finally, they allege
that the plan is using investments that
underperform their benchmarks.
1
Plan
participants claim that these duciary
breaches cost them millions of dollars in
lost retirement benets.
Excessive fee claims rst emerged in 2006
and, for much of the last decade, these
claims targeted very large 401(k) plans,
meaning plans with tens of thousands
of participants and billions of dollars in
plan assets. That has changed in recent
years with an increase in lawsuits against
all types of plans (e.g., 403(b) plans,
multiple employer plans, dened benet
pension plans, and even ERISA-exempt
plans) and all types of plan sponsors (e.g.,
publicly traded companies, privately held
companies, universities, not-for-prot
organizations, nancial institutions, and
healthcare systems). Furthermore, the
last few years have also seen an uptick in
lawsuits involving smaller plans, including
plans with fewer than 1,000 participants
and less than $100 million in assets.
Although it can be dicult to predict
which plans will be targeted in the future,
it is clear that duciaries of smaller plans
should no longer consider themselves to be
immune from this kind of litigation risk.
One of the reasons behind this increase
may be that plaintis’ law rms that
were not previously known in the ERISA
litigation space have started ling excessive
fee claims. Using plan information obtained
from public lings, these new entrants are
able to easily model their complaints in
“cookie cutter” fashion after those led by
more experienced rms that have honed
their pleadings through years of experience
in much bigger cases. In fact, the primary
hurdle to bringing an excessive fee claim
may be the ability of the plaintis’ bar
to recruit a plan participant to serve as a
named plainti.
At the outset of a lawsuit, plan duciaries
have the opportunity to move to dismiss
a case by arguing that the facts alleged,
even if true, do not constitute a breach of
duciary duty. If the case is not dismissed
at the outset, then it proceeds onto
protracted discovery, which generally
entails the review and production of
thousands of documents as well as taking
the testimony of numerous plan duciaries
and other company employees. In
addition, both sides retain costly expert
witnesses. Some courts even allow for
discovery to begin prior to the resolution
of a motion to dismiss – giving plan
participants the opportunity to uncover
new facts to strengthen their allegations
and making the case more expensive to
defend from the outset. In this context,
even a awless legal defense of the best
run plan can be an expensive and time-
consuming endeavor, 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.
Predicting Which Plans Might Be
Targeted
Due to the presence of new plaintis’
rms in the mix and to constantly evolving
theories of legal liability, it is dicult
to predict which plans might attract
unwanted attention. However, it appears
that there are some plan characteristics
that may make a plan more susceptible to
being sued. Note that this is not meant to
suggest that plans with such characteristics
are paying excessive fees or engaging in
imprudent or improper conduct. Rather,
the following is a list of plan characteristics
that have been targeted in the past, and
thus 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 via scheduled Requests for
Proposals (RFPs) from recordkeepers.
• Paying recordkeeping fees as a
percentage of assets under management
rather than at a xed per participant
rate, and/or not switching to a xed rate
as plan assets grow.
• Failing to use the least expensive
mutual fund share class available (e.g.,
institutional shares) as investment
options.
Fiduciaries of
retirement plans of
all sizes are being
sued as the wave
of excessive fee
claims continues to
grow. Could you be
next?
1. Of course, these cases continue to evolve as plan participants test out new theories of liability, such as claims concerning the alleged misuse of
plan participant data by recordkeepers.
3
• Failing to use separate accounts or
collective investment trusts rather than
mutual funds as investment options – but
note that some complaints make the
exact opposite allegation.
• Oering too few or too many investment
options.
• Oering investment options that are too
risky or too conservative.
• Failing to oer more index funds.
• Oering investment options, particularly
life-cycle/target-date funds, that are
aliated with the plan’s recordkeeper.
• Oering investment options that
underperform net of expense relative to
an index or benchmark.
Of course, plan duciaries may have
good reasons to support the challenged
decisions. And while those good reasons
– and a thorough and well-documented
process for making those decisions – can be
critical to a successful defense of these suits,
plan duciaries can expend signicant time
and money to prove that they acted with
the appropriate level of care.
Steps That May Reduce Exposure to
Excessive Fee Claims
Under ERISA Section 409, duciaries
are personally liable for a breach of
duciary duty, including claims that they
allowed the plan and its participants to
pay excessive fees and use expensive
and underperforming investments.
Some duciaries mistakenly believe that
they can entirely avoid this liability by
hiring professionals to handle all of these
decisions. Also, the law does not allow
duciaries to totally delegate away all of
their duciary responsibility.
2
So what
can duciaries do to protect themselves?
Of course, plan duciaries should always
act with care and undivided loyalty to the
plan and its participants. And while there
is no foolproof way to avoid or defeat an
excessive fee claim, there are some steps
that may help to reduce the size of the
bullseye on the backs of plan duciaries:
• Establish, follow, and document a
robust and prudent process for retaining
recordkeepers and determining their
fees, including:
– Periodically solicit RFPs through
which a number of recordkeepers can
submit competing bids for the plan’s
business
– Benchmark recordkeeping fees
using an appropriate, independent
benchmark
– Negotiate fees rather than accepting
quoted fees without question
– Investigate whether there is any
revenue sharing being paid and
consider negotiating limits on it
• Establish, follow, and document a robust
and prudent process for selecting and
regularly reviewing plan investments
and investment expenses, including:
– Select appropriate benchmarks for
analyzing investment performance net
of expense
– Follow a consistent process for
replacing underperforming
investments
– Investigate and consider the
availability and advisability of using
less expensive investment vehicles and
share classes
– Maintain a diverse portfolio of plan
investment options, including index
funds
• Retain qualied, independent experts to
assist with duciary decisions – and don’t
rely on benchmarks provided by service
providers who are justifying their own
fees or performance
• Document the process and rationale
behind any duciary decision, being
meticulous when deciding to use more
expensive products or services and/or
when going against expert advice
As mentioned previously, plan duciaries
can be held personally liable if they
violated their duciary duties. Moreover,
ERISA Section 410 bars plans from
indemnifying plan duciaries against
breach of duciary duty claims. Thus,
a lynchpin of any loss mitigation eort
is to obtain adequate duciary liability
insurance. Breach of duciary duty claims
under ERISA are precisely the type of
exposure that duciary liability insurance
is designed to protect against.
Some employees have employee benets
liability coverage as part of their general
liability coverage; this provides coverage
to an employer for errors or omissions
in the administration of an employee
benet program. Employee benets
liability coverage will most likely not insure
against an excessive fee claim, since these
policies are designed to cover clerical
administrative errors – not the duciary
breach claims that take center stage in
excessive fee litigation.
In light of this personal liability, plan
duciaries who do not have duciary
liability insurance may be placing their
personal assets at risk in the event of
an excessive fee claim.It’s important to
obtain duciary liability insurance from an
experienced carrier that can successfully
defend (and potentially settle) an excessive
fee claim with as little disruption and stress
as possible.
Mitigating Corporate and Personal Risk
Even the most well-run plans can be the
target of an excessive fee claim, which
can cost millions of dollars to defend
and/or settle. Fiduciaries of plans of all
sizes should familiarize themselves with
the basic allegations in these claims and
review (and, if necessary, revise) how they
select and monitor recordkeepers and
plan investments. Last but not least, plan
duciaries should obtain adequate duciary
liability insurance from an experienced
carrier to help mitigate and protect against
potentially devastating, personal exposure
to excessive fee claims.
2. Willett v. Blue Cross and Blue Shield of Alabama, 953 F.2d 1335, 1340 (11th Cir. 1992)
Plan duciaries
who do not have
duciary liability
insurance may
be placing their
personal assets at
risk in the event
of an excessive fee
claim.
Alison L. Martin is Senior Vice President
and Fiduciary Product Manager for
Chubb’s North America Financial Lines
division. Ms. Martin is responsible for
the underwriting of all duciary liability
products at the company, including
coverages for publicly traded and
privately held companies, not-for-prots,
multi-employer plans and healthcare
plans. She can be contacted via email at
almartin@chubb.com.
Lars C. Golumbic is a Principal at Groom
Law Group, Chartered, and Chair of
Groom’s litigation practice group. Mr.
Golumbic is a nationally recognized ERISA
litigator, and is listed by Chambers USA,
The Legal 500, Best Lawyers, and Super
Lawyers as one of the top ERISA litigators
in the country. He can be contacted via
email at lgolumbic@groom.com.
www.chubb.com/us/duciaryliability
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