Fee Litigation Costs Rising Despite Fiduciary Insurance Coverage

401k fiduciary lawsuitFee litigation costs are following suit of many employer expenses.  401(k) plan fee litigation costs are rising, and employers may have to foot a hefty portion of the cost – to the tune of $10 million or more – before their fiduciary liability insurance kicks in.  The market for fiduciary liability insurance has been rocked by the proliferation of 401(k) plan excessive fee lawsuits.

Fiduciary liability insurance is designed to provide protection for fiduciaries accused of mismanaging their employee benefit plans.  Specifically, it helps defray fee litigation costs should a retirement plan sponsor or retirement plan committee get sued for breach.  These cases are driven by fiduciary responsibility under the Employee Retirement Income Security Act (ERISA), the law that governs employee benefit plans.

Fiduciary liability insurance policies used to be relatively inexpensive.  Now, however, given the high rate of 401(k) plan fee lawsuits the cost of these policies has skyrocketed over the past two years.  According to a Bloomberg Law analysis cited in this article, retirement plan investors have filed about 140 proposed class actions challenging their plans’ fees, just in 2020-21 alone.  This is a tremendous increase from 2019, when only about 20 such suits were filed.  The uptick in cases is partly because lawsuits are moving down market to smaller plans, whereas previously, they were mostly isolated to larger retirement plans.

The risk has caused the fiduciary liability insurance industry to reevaluate the way its policies work.  The biggest change, according to Bloomberg Law, is that retentions – the amount companies must pay out of pocket before their insurance coverage kicks in – have gone up.  Retentions are similar to a medical insurance deductible.  According to Larry Fine, management liability coverage leader with Willis Towers Watson, who was quoted in the Bloomberg Law article, fiduciary policies used to have a $0 or modest five-figure retention.  Now, nearly all insurers are requiring seven-figure retentions for 401(k) plan excessive fee lawsuits, he noted.  One insurer requires a $10 million retention, Mr. Fine said.

Litigating 401(k) plan fee lawsuits is expensive.  In addition, there are more of these types of cases going to court.  Of the cases filed in 2020, 30 have at least partially survived a motion to dismiss.  Only 10 cases have been dismissed, according to Bloomberg Law.  The settlement payouts can also be significant.  All of these factors are impacting rising retention costs and fiduciary liability coverage premiums because it’s difficult for insurers to accurately assess the risk of unpredictable excessive fee lawsuits.

While the retentions and premiums may be higher on policies purchased from larger fiduciary liability insurance carriers, lesser-known players may enter the market, creating opportunities for cost savings.  Plan sponsors and retirement plan committees should review their existing fiduciary liability insurance coverages to ensure what they have.  Then compare that to the coverage they need.  The next step is to compare their current policy to additional policies available on the market.  This eventually leads plan fiduciaries to find the best protection at a reasonable price point.  Even when looking at fee litigation costs, retirement plan fiduciaries should always put participants’ best interests first.  This prudent step helps fiduciaries to avoid costly litigation in the first place.

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