Excessive fee claims pose a major risk to advisors. From questionable allegations to cookie-cutter ERISA lawsuits, excessive fee claims are growing, impacting more and more retirement plan fiduciaries.
These sprawling class-action lawsuits can put both your professional and personal assets at risk but there are some simple things you can do to reduce your risk and avoid a claim. Here are 7 easy ways to reduce your excessive fee claim risk:
1. Solicit RFPs from Vendors
Fiduciaries who haven’t conducted a formal request for proposal process with plan vendors recently are at greater risk than those who have. Fees have fallen dramatically over the last five years, meaning that plan fiduciaries who haven’t yet solicited an RFP are paying plan fees above peer plans. Going forward, plan fiduciaries should solicit RFPs at least every three years.
2. Conduct Quarterly Reviews
Plan fiduciaries who take documentation and due diligence seriously will enjoy the greatest reduction in their level of risk. Quarterly fee and performance reviews can help ward off many excessive fee suits, particularly when you are able to show that your plan fees are reasonable based on a current industry benchmark. As part of your review, document the reason for any percentage-based recordkeeping fees used in the plan, such as when a plan has many accounts with small asset levels.
3. Phase out Revenue Sharing
Fiduciaries should phase out any remaining revenue-sharing arrangements they are still engaged in with their recordkeepers. Even duties performed in good faith that have the appearance of revenue sharing, such as an advisor’s costs for marketing paid to a recordkeeper, can be misinterpreted as improper and result in a lawsuit or claim. Work with your recordkeeper to phase out these expenses and have any required recordkeeping expenses applied to the participant accounts.
4. Switch to a Flat-Fee Basis
Plan fiduciaries should make every effort to use flat per-participant fees when possible, minimizing any percentage-of-asset fees as much as possible. Remember that fiduciaries have a responsibility to plan participants to negotiate, minimize and control the plan’s administrative expenses.
5. Add Low-Cost Index Funds
Fiduciaries also have a responsibility to maintain a diverse portfolio of plan investment options for participants, even if you have actively managed funds in your plan’s investment lineup. It’s important not only to offer participants index funds but to ensure there are enough low-cost index funds available as an option for those who may want it.
6. Certify Lowest-Cost Funds
Plan fiduciaries can sometimes discover they were less prepared to defend against an excessive fee claim than they thought they were. It’s important not only to offer the least expensive mutual fund share class available, but to make sure that’s the lowest cost available. Have the investment fund manager certify that they are, in fact, the lowest cost funds available.
7. Work with Plan Experts
Fiduciaries are only human and it’s always possible you could make a mistake. By enlisting help from a plan expert, you can minimize the risk that a plan management or investment decision you make results in excessive fees or underperforming assets. Seeking outside expertise adds a new cost of doing business but can help lower the risk to your business and your career.
How to Protect Your Business and Your Career
Excessive fee lawsuits can put your personal as well as professional assets on the line. Under ERISA Section 409, retirement plan fiduciaries are personally liable for a breach of their fiduciary duty and the rule has been invoked in the case of past claims involving excessive fees, resulting in personal loss for advisors.
To protect yourself and your future, ensure your insurance carrier offers claim experience, industry expertise, strong financials and a commitment to protecting retirement plan advisors like you.
Lockton Affinity Advisor offers coverage with individual limits, not shared aggregate limits like some others, meaning you always have access to your full policy limits. We have decades of experience specializing in insurance solutions for the financial services industry to better protect you. Plus, Lockton Affinity Advisor coverage meets ERISA standards, including services as an ERISA 3(21) and 3(38) advisor for your added protection and peace of mind.