To Avoid Excessive Fee Litigation, SMBs Must Fulfill Fiduciary Duties
Excessive fee litigation is a relatively new phenomenon in the fiduciary liability world. Historically, these lawsuits have targeted large employee benefits plans with thousands of participants and more than $1 billion in assets. However, smaller plans have experienced a surge of claims in recent years, indicating a major sea change for fiduciary liability risk among small businesses.
Plans with less than $500 million in assets accounted for 20% of all excessive fee lawsuits in 2022. The total number of cases also increased by 80% in the same year, marking the second-highest historical year ever. Typically, these lawsuits are brought by plan participants or beneficiaries who claim that the plan administrators have breached their fiduciary duties under the Employee Retirement Income Security Act of 1974 (ERISA).
Under ERISA, fiduciaries are required to act in the best interest of plan participants. They must ensure the investments are consistent with the plan's objectives, the plan is well-diversified, and that the plan fees are reasonable and fair. As the providers of benefits plans, businesses are subject to fiduciary duties. In the event of a claim, business owners can be held liable and may be required to pay out from both business assets and personal assets — even if the plan is managed by a third party.
Small business owners are often unaware of their fiduciary liability risks and gaps in insurance coverage. As a broker, you can help your clients stave off excessive fee lawsuits by advising them on their fiduciary duties and helping them identify possible risks associated with employee benefits plans.
Establish a prudent process and maintain detailed records
A prudent process is crucial to making sound decisions and can also be valuable when defending against excessive fee claims. This process should capture the ways in which plan-related decisions are made and include details regarding the selection of recordkeepers, investment goals, benchmarks, and outside expertise.
Having a thoughtful process in place generally demonstrates that a business is exercising sound judgment and being diligent about the decisions it makes. Conversely, managing benefits plans without a prudent process may be seen as an indicator that a business is not fulfilling its fiduciary obligations.
Perhaps one of the most important aspects of this process is maintaining detailed records of all meetings, communications, and decisions, particularly those that warrant further justification. In the event of a claim, thorough documentation shows that a business is meeting the requirements of ERISA by exercising “care, skill, prudence and diligence under the circumstances.”
Exercise sound judgment when selecting a recordkeeper
Plaintiffs in excessive fee lawsuits may point to a lack of diligence in the selection of the plan recordkeeper. Soliciting requests for proposal or promoting competitive bidding are effective ways to secure competitive pricing for plan beneficiaries.
Businesses are also encouraged to negotiate recordkeeper fees and not accept quoted fees without scrutiny. For example, Xerox recently agreed to pay a $4.1 million settlement after facing claims that it passed on to participants excessive fees for recordkeeping services.
Monitor investments and investment expenses
If a plan underperforms, businesses may face greater scrutiny regarding how the plan investments were selected and maintained. This includes using improper benchmarks to monitor performance, offering too many investment options, and investing in funds with a clear conflict of interest.
Businesses may also face allegations that fiduciaries selected more expensive investment options when better and cheaper alternatives were available. For example, the concert promoter Live Nation Entertainment was recently hit with a class-action complaint that its 401(k) plan was filled with high-cost share class mutual funds instead of identical funds available at lower cost, resulting in a loss of nearly $4.5 million for plan participants.
Businesses are not always required to provide the cheapest option available, but they must be thoughtful when evaluating options and provide documentation to justify why a specific decision was made.
Embrace the help of outside professionals
Third-party benefits administration professionals can bring objectivity to the decision-making process, which is especially valuable for owners of newer or smaller businesses. As an independent voice, these experts can also provide reliable benchmarks for pricing and performance.
Businesses should also explore regular training sessions for fiduciaries, as a lack of adequate expertise is commonly cited in excessive fee claims. Fiduciaries who do not possess the required knowledge to administer a plan and fail to hire outside professionals may be targeted by these lawsuits.
Quote Fiduciary Liability for your clients — faster than ever
Fulfilling fiduciary duties is an effective way to reduce the likelihood of a lawsuit, but it’s impossible to prevent them entirely. As excessive fee lawsuits become more commonplace, fiduciary liability insurance is more important than ever.
With comprehensive Fiduciary Liability insurance from Coalition, businesses with up to $250 million in plan assets can receive coverage up to $10 million in limits. In addition to our excessive fee coverage, our policies can include:
ERISA penalties sublimit
COBRA penalties sublimit
HIPAA penalties sublimit
Health Care Reform Act penalties sublimit
Pension Protection Act penalties sublimit
United Kingdom Pensions penalties sublimit
We’ve streamlined the quoting experience for brokers and reduced the amount of manual data collection by integrating with Form 5500. Now, you can spend more time advising clients and growing your business. Plus, Fiduciary Liability insurance can be purchased on a standalone basis or packaged with Coalition’s full suite of Executive Risks products.
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