Rising litigation costs despite fiduciary insurance coverage


The costs of litigation of fees are the result of many expenses of the employer. Litigation costs related to 401 (k) plan fees are increasing, and employers may have to shoulder a significant portion of the costs – to the tune of $ 10 million or more – before their fiduciary liability insurance takes effect. The fiduciary liability insurance market has been rocked by the proliferation of 401 (k) plan excessive fee lawsuits.

Fiduciary liability insurance is designed to provide protection to trustees accused of mismanaging their benefit plans. Specifically, it helps defray legal costs if a pension plan sponsor or pension committee is sued for violation. These cases are motivated by fiduciary responsibility under the Employees Retirement Income Security Act (ERISA), the law that governs employee benefit plans.

In the past, fiduciary liability insurance policies were relatively inexpensive. Now, however, given the high rate of lawsuits for 401 (k) plan fees, the the cost of these policies has exploded over the past two years. According to a Bloomberg Law Analysis cited in this article, pension plan investors have filed approximately 140 proposed class actions challenging their plan fees in 2020-21 alone. This is a considerable increase compared to 2019, when only around 20 such lawsuits were filed. The rise in the number of cases is in part due to the fact that lawsuits are moving down the market to smaller plans, where previously they were mostly isolated from larger pension plans.

The risk has led the fiduciary liability insurance industry to reassess the functioning of its policies. The biggest change, according to Bloomberg Law, is that withholdings – the amount businesses have to pay out of pocket before their insurance coverage goes into effect – have increased. Deductions are similar to a medical insurance deductible. According to Larry Fine, manager of management liability coverage at Willis Towers Watson, quoted in the Bloomberg Law article, trust policies had a retention of $ 0 or a modest five-figure. Today, almost all insurers require seven-figure retentions for excessive 401 (k) plan charges lawsuits, he noted. An insurer demands a retention of $ 10 million, Mr. Fine said.

Lawsuits over 401 (k) plan fees are expensive. In addition, more and more cases of this kind are brought before the courts. Among the cases filed in 2020, 30 have at least partially survived a motion to dismiss. According to Bloomberg law, only 10 cases were cleared. Settlement payments can also be significant. All of these factors affect the rise in retention costs and premiums for fiduciary liability coverage, as it is difficult for insurers to accurately assess the risk of unpredictable claims for excessive charges.

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

Chalk Steff

Chalk Steff

Steff C. Chalk is Executive Director of The Retirement Advisor University, a collaboration with UCLA Anderson School of Management Executive Education. Steff is also executive director of The Plan Sponsor University and is currently a professor at The Retirement Adviser University.

Chalk Steff

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