Litigation involving the fees and charges assessed to company benefit plans have been a mainstay in the management liability world for the better part of the 2000s. Notably, a spike in litigation began in 2006, when a number of class actions were filed against large companies, including Lockheed Martin, Caterpillar, General Dynamics and International Paper. After a number of large settlements, these “excessive fee” suits seemed (at least for a time) to be shifting in form — to focus more on colleges and universities.
More recently however, NFP and others have noted some particular recent upticks in the filing of these suits. Additionally, the suits seem to have developed to include smaller plans in addition to the large managed plans and educational institutions previously targeted by the plaintiffs’ bar.
Common Excessive Fee Complaints
Excessive fee litigation is typically brought against the plan fiduciaries and include allegations that the fiduciary did not meet their obligations to plan beneficiaries in selecting or administering investments in a cost-efficient manner. Additionally, many of these complaints also suggest conflicting principles or interests that negatively impact the value or magnitude of the investments or deplete the assets being managed because the fiduciaries inappropriately agree to unnecessary, duplicative or excessive management fees. As just a few examples of complaints:
- Excessive recordkeeping fee amounts and calculations for administrative expenses (when these are correlated to plan size, as opposed to fixed fees, they are often under greater scrutiny in these complaint).
- Expensive fee loads on portfolio investment types and nature of investment strategy.
- Lack of independence or distance between investment and plan fiduciary affiliation or recordkeeper functions (that ostensibly lead to inappropriate fee calculations and agreements).
The suits are normally brought under ERISA Section 409, which generally provides that plan fiduciaries can be held personally liable for a breach of fiduciary duty, including claims that they allowed the plan and its participants to pay excessive fees and use expensive and underperforming investments.
Minimizing Fiduciary Risk
While the nature of the cases don’t seem to have fundamentally changed – indeed, many of the complaints in this space are virtually identical to those filed in earlier years, some with even the same spelling and grammatical errors – what seems to be changing are the targets. Because of the availability of public information about plans through Form 5500 filings, we are increasingly seeing a well-educated, motivated plaintiffs’ bar looking for opportunities. In all circumstances, we suggest (among other steps):
- Fiduciaries and plan sponsors should review and keep abreast of developing litigation in this space, noting theories that are increasingly questioning the choices being made in administering plans.
- Fiduciaries and plan sponsors should speak with legal advisors about best practices in overseeing and administering plans.
- Fiduciaries and plan sponsors should understand the duties, and potential risks and protections, associated with vendors providing investment guidance and/or other services in connection with plan oversight and administration.
- Fiduciaries and plan sponsors should ensure that adequate fiduciary liability insurance from an experienced carrier is employed to help mitigate potential loss from these and other risks.
Of course, we also encourage fiduciaries and plan sponsors to contact your NFP representative for more information about fiduciary liability insurance designed for the protection of benefit plan fiduciaries and sponsors for a variety of different industry segments and company profiles.