Over the last year, advisor insurance claims for excessive fee lawsuits have skyrocketed. If you are a retirement plan fiduciary, you too could be at an increased risk for an allegation that the investment manager or recordkeeper is being paid too much.
It’s beneficial to understand what exactly plaintiffs are alleging when they bring these lawsuits, so that you can take the proper steps to protect yourself. Here’s what to know, including the 15 excessive fee lawsuit examples:
Excessive Fee Lawsuit Allegations Broken Down
In an excessive fee lawsuit, the plan fiduciary is accused of breach of fiduciary duty by failing to meet two key obligations of their fiduciary duties:
- That plan recordkeeping and investment management fees are reasonable.
- That plan investments perform well.
Excessive fee lawsuit allegations continue to evolve as aggressive law firms attempt to bring new cases and win bigger settlements. Often, these accusations target fiduciaries doing their jobs according to the historical practice and commonplace norms of financial advising. But litigants claim these norms led to a breach of fiduciary duty.
Core themes of the lawsuits include:
- Overpaying for administrative expenses leading to a loss.
- Overpaying for investment fees leading to a loss.
- Choosing underperforming investment options leading to a loss.
15 Excessive Fee Lawsuit Examples
- Allowing recordkeepers to charge asset-based fees rather than per-participant based fees represents a failure to negotiate, control and minimize the plan’s administrative expenses.
- Sharing revenue with recordkeepers through revenue-sharing fees is an improper practice and proves unfair excessive fees are borne by some or all plan participants.
- Neglecting to conduct a competitive RFP bidding process for administrative services on a regular basis to take advantage of the lowest industry fee rates.
- Using a related company as a go-between recordkeeper resulting in multiple active recordkeepers, which means higher fees and lower account accumulations for plan participants.
- Failure to offer the lowest cost share class of the investment company as an investment option for plan participants in terms of institutional funds rather than retail.
- Breaching fiduciary duty to monitor and manage the plan investment fees to achieve the lowest cost when there are less expensive investment options available.
- Poorly performing investment options according to the plaintiff’s own carefully selected performance benchmark.
- The retirement plan employer’s proprietary funds are used as an investment option and it underperformed.
- Offering plan participants any proprietary funds at all.
- Failing to choose an appropriate investment option within a particular investment category singled out by the plaintiff. For example, choosing stable value or a money market fund as the capital preservation option.
- Offering specific money market funds in place of stable value funds as the plan’s capital preservation.
- Selecting active investment options as underlying holdings that do not provide value for higher fees.
- Managing the plan improperly by only offering actively managed investments which are more expensive than other options.
- Offering plan participants too many investment options causing investors confusion or indecision, and potentially denying plan participants the price breaks that may come with offering more assets.
- Having anything but the absolute cheapest share class available as an option to plan participant investors.
Excessive Fee Lawsuits Then and Now
Excessive fee suits are a costly form of litigation that used to be rare. The first cases emerged around 2006, targeting some of the biggest industry players, with billions in assets under management. More lawsuits were filed after the 2008 recession, and another wave is beginning after losses sustained in 2020.
Though ERISA litigation is complex, the number of claims being filed is increasing because inexperienced firms have been able to model “cookie cutter” lawsuits based on the successes of more experienced firms. If a claim can survive a motion to dismiss, costs soar exponentially to defend yourself. This leads many to settle, even if you’ve done nothing wrong.
Excessive fee lawsuits put an advisor’s personal and professional assets at risk. The best way to protect yourself is to make sure you have the correct insurance coverage. Not all coverage will protect against the allegations alleged in excessive fee lawsuits.
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. Lockton Affinity coverage can protect you against unfounded excessive fee claims and more.