Large class-action lawsuits claiming retirement plan fiduciary negligence resulting in excessive fees have been with us for a long time. But as we recently wrote, this threat has evolved—now any fiduciary of a retirement plan can face significant risk of a claim.
While there are indeed some professionals who may improperly execute their fiduciary duties when it comes to plan fees, many others do not. Advisors should be aware that you do not have to charge excessive retirement plan fees to clients to be targeted for a lawsuit.
If you are unaware of the danger posed by excessive fee lawsuits, you may find yourself on the hook and unprepared to defend yourself.
Luckily, there are ways of mitigating both the corporate and personal risks of excessive fee claims that any advisor can and should use to protect their business and their personal assets. Consider the following tips.
Take Steps to Reduce Exposure
As a plan fiduciary, you can take steps to reduce your exposure. While acting with care and diligence to the plan and its participants is always the best course, the following specific protective actions can help minimize your risk of an excessive fees claim:
For recordkeepers and recordkeeper fees:
- Establish, follow and document a process for retaining recordkeepers and determining their fees.
- Solicit RFPs periodically to allow for recordkeepers to submit competing bids for the plan’s business.
- Evaluate the plan’s recordkeeping fees against an appropriate and independent benchmark.
- Enter negotiations on fees for recordkeeping and avoid accepting quoted fees without question.
- Evaluate whether any revenue sharing is being paid and consider negotiating limits on the practice, where needed.
For investments and investment expenses:
- Establish, follow and document a process for selecting and regularly reviewing plan investments and investment expenses.
- Select benchmarks for analyzing investment performance net of expense that are appropriate and comparable to the plan’s investments.
- Have a plan for replacing underperforming investments and follow it consistently.
- Evaluate the availability and advisability of using less expensive investment vehicles and share classes.
- Maintain a diverse portfolio of plan investment options that includes index funds.
For other plan decision making:
- Retain qualified independent experts to assist with fiduciary decisions.
- Avoid becoming reliant on benchmarks provided by your service providers to justify their own fees or performance.
- Ensure you document the process and rationale behind all fiduciary decisions.
- Be especially meticulous in your documentation when choosing more expensive products or services or when going against expert advice.
Understand How to Mitigate Corporate Risks
Even the most well-run plan could become the target of an excessive fees claim. As these lawsuits cost millions of dollars to defend against or settle, you should familiarize yourself with the basic allegations that constitute these claims.
Claims are made about things a fiduciary failed to do, such as:
- Negotiate a recordkeeper’s quoted rates.
- Revalidate fee rates with planned requests for proposals.
- Switch to fixed per-participant fee rates as plan assets grow.
- Use the least expensive mutual fund share class available as investment options.
- Use separate accounts or collective investment trusts.
- Offer a sufficient number of index funds.
Claims are also made about things a fiduciary did do but allegedly should not have, such as:
- Pay recordkeeping fees as a percentage of assets under management.
- Offer too few or too many investment options.
- Offer investment options that are too risky or too conservative.
- Offer life cycle or target-date funds affiliated with the plan’s recordkeeper.
- Offer investment options that underperform net of expense relative to a benchmark.
Understand How to Mitigate Personal Risks
An excessive fee lawsuit also put your personal assets at risk, because of the allegation of breach of fiduciary duty. Under ERISA Section 409, retirement plan fiduciaries are personally liable for a breach of their fiduciary duty and this personal responsibility may not be delegated away by hiring other decision-making professionals. ERISA Section 409 has been invoked in the case of past claims involving excessive fees, resulting in personal loss for advisors.
The best way to protect your personal assets is to ensure that you have the correct insurance coverage. Employee benefits liability coverage designed to cover clerical errors will not protect you from an excessive fee claim involving allegations of breach of fiduciary duty. Even some professional liability policies for plan advisors may leave you with exposures to the risks outlined here, because they lack the experience to defend against and the means to settle an excessive fee claim.
To protect yourself and your future, make sure your insurance carrier offers you claim experience, industry expertise, strong financials and a commitment to protecting retirement plan advisors like you.
At Lockton Affinity Advisor, we offer Errors & Omissions (E&O) Liability Insurance coverage that meets ERISA standards, including services as an ERISA 3(21) and 3(38) advisor, for your added protection and peace of mind. We have decades of experience specializing in insurance solutions for the financial services industry to better protect you. Plus, we offer coverage with individual limits, not shared aggregate limits like others, meaning you always have access to your full policy limits.