Excessive Fee Lawsuits are on the Rise: Is Your Plan at Risk? Unless you’ve been living under a rock, you’re likely aware that lawsuits against plan sponsors over retirement plan fees have sprung up like wildfire in the past few years. According to a recent summary of fee-related lawsuits published by Washington, D.C.-based employee benefits law firm Groom Law Group, 2017 has been a busy year for excessive fee litigation: 30 cases have been filed in nearly every circuit in the United States. By contrast, only 80 ERISA excessive-fee cases were filed across the country in the past decade, Groom observed.
Plan fees have come to the fore as a result of more stringent regulations under the Department of Labor (DOL) fiduciary rule passed in June 2017. From a presentation given recently by Todd Solomon, a partner at Chicago-based law firm McDermott Will & Emory LLP at the 36th Annual ISCEBS Symposium, the duties of plan fiduciaries under the DOL rule include:
- Acting solely in the interests of plan participants and their beneficiaries
- Carrying out their duties prudently
- Following the plan documents (unless inconsistent with ERISA)
- Diversifying plan investments
- Paying only reasonable expenses
Failure to fulfill any of these duties could be grounds for litigation against a retirement plan sponsor and/or fiduciary decision-makers, i.e., the members of a plan committee. The stakes are high and the potential penalties are steep — up to and including personal liabilities for losses and being barred from future fiduciary duty.
Since fees have become more transparent and disclosures more widely available as a result of the fiduciary rule, they’ve become a somewhat “easy” target for lawsuits. According to Groom: “In particular, the lawsuits allege excessive or hidden fees, improper selection or monitoring of investment options, and revenue sharing and other alleged self-dealing transactions with respect to defined contribution plans. “
Groom breaks down excessive fee litigation into three distinct types:
“The first involves lawsuits against large corporate plan sponsors challenging fees and expenses associated with employee plans… The cases typically allege that the investment options selected by plan sponsors are overly expensive, underperforming, and imprudent compared to alternative investment vehicles available in the marketplace.
The second type involves lawsuits against financial institutions who also happen to be plan sponsors. In these cases, the plaintiffs make similar claims as in general excessive fee cases, but also allege that these plan sponsors used affiliated investment products and service providers to increase the financial institution’s revenue…
The most recent iteration of excessive fee cases involves university-sponsored 403(b) plans. The allegations in these actions are similar to those made in the general excessive fee cases — that the university plan fiduciaries breached their ERISA duties by, among other actions, offering large, complex investment lineups with options that were expensive, duplicative, and poorly performing.”
Small plans and healthcare system 403(b) plans are also facing fee-related lawsuits. It seems no defined contribution (DC) plan is immune to the potential for excessive fee litigation.
All is not lost, however. Groom points out that the tide of litigation may be turning in plan sponsors’ favor. In several recent cases, the courts have poked holes in the plaintiffs’ complaints, and it seems, at least in some instances, these lawsuits are becoming more difficult for plaintiffs to win.
Solomon offers some best practices for fiduciaries in his ISCEBS Symposium presentation, including monitoring investment management and recordkeeping fees to ensure they are reasonable, documenting plan governance and fiduciary decision-making processes, and making sure you understand the advice you’re being given by your retirement plan advisor.
He also proffers some relevant takeaways for plan fiduciaries:
- Meet regularly/document the process!
- Address underperforming funds quickly.
- Adopt an investment policy statement and follow it.
- Adopt good governance: delegations, charters, minutes, etc.
- Review vendors periodically and conduct an RFP for lower fees.
- Engage a qualified, independent advisor and pay reasonable fees.
- Consider elimination of revenue sharing.
- Make sure you are in the lowest share class.
- Take claims/inquiries seriously – follow the ERISA claims procedure.
This is sound advice in any environment, but particularly now as plan sponsors are facing increasing numbers of excessive fee lawsuits. Plan sponsors, take heed.
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