Advisors have been hearing a lot about recent excessive fee lawsuit cases these days. With so much repetitive news, it’s understandable if you’ve thought about tuning it out. But remember that these ERISA-based class action lawsuits can pose a huge risk to your career and personal assets. Under ERISA Section 409, a retirement plan fiduciary’s personal assets are at risk if you are accused of a breach of fiduciary duty.
Unfortunately, these cookie-cutter lawsuits are continuing to multiply. In 2020, more than 200 ERISA class action cases were filed against employers and their retirement plans, a figure that’s double what it was in 2018. With so many cases, everyone is at risk, from multinational corporations to small privately-owned businesses. Here’s a look at 5 recent excessive fee lawsuit case examples for added insight into this evolving risk.
The Anthem excessive fee suit is a recent and notable example of how common accusations are directed at big asset funds. The St. Louis-based law firm Schlichter, Bogard & Denton filed the original suit in the Southern District of Indiana in 2015.
With $5.1 billion assets under management, the plan was accused of:
- Selecting overly expensive share classes when cheaper ones were allegedly available.
- Overpaying the recordkeeper by not having fixed per-participant fees.
- Offering a money market fund instead of a stable value fund.
The suit argued Anthem breached fiduciary duty by not leveraging its large size to get better rates. Anthem had most investments with Vanguard, which, counterintuitively, has a reputation for its low fees. Interestingly, a 4-basis point fee for the Vanguard Institutional Index Fund was judged too high. Anthem settled in April of 2019 for $23.65 million, not including its legal defense costs.
The Chevron excessive fee suit makes a strong case of the arbitrary standards and disparate outcomes of many ERISA lawsuits. The Chevron case was filed in 2016 by the same law firm as the Anthem case, alleging similar claims for a plan with a similar structure.
Chevron has even more assets under management, with a $19 billion plan, and was singled out for Vanguard share classes offered at a 5-basis point fee. However, San Francisco’s 9th Circuit Court of Appeals dismissed the class action and the Supreme Court decided not to review the case in May of 2019, at a time when the Anthem settlement was still in the news. Yet it’s a modest victory after years of costly litigation.
Stadion and United of Omaha
An ERISA case involving Stadion Money Management and United of Omaha Life Insurance Company shows that not all cases involve large plans. In 2019, the Nichols, Kaster Law Firm filed suit against the managed account provider Stadion and the insurer United of Omaha over the plan management of a California amusement park employer.
This was a small 401(k) plan with only $32 million in assets. Nonetheless, the fiduciaries were accused of a form of revenue sharing that allegedly breached their fiduciary duties. The claim stated that United of Omaha’s investment options were used where lower-cost and higher-performing options were available. In the most recent update available, the case survived a motion to dismiss and the parties were advised to prepare for trial.
A recent ERISA settlement by the naval defense contractor Serco shows that the appetite for excessive fee lawsuits continues. In 2019, the firm of Greg Coleman Law filed suit on behalf of thousands of plaintiffs claiming a familiar list of accusations:
- Fees for investment offerings were too high.
- Less-expensive share classes weren’t offered.
- Plan investments were improperly monitored.
The plan had $335 million in assets under management and was criticized for plan fees that averaged 0.81% with 21 of 30 available funds allegedly offering a lower-cost share class. After surviving discovery in the Virginia Eastern District Court, Serco settled in mid-2021 for $1.2 million.
In another recent case, John Hancock Life Insurance agreed to a settlement for an ERISA suit targeting the self-dealing of its defined contribution plan. The law firm of Block & Leviton filed the class action suit in the U.S District Court of Massachusetts in early 2020. Claims included:
- Inappropriate preference for John Hancock products.
- Poor performance of chosen investments.
- High fee costs of chosen investments.
- “Lack of traction” among fiduciaries of similarly sized plans.
- Lack of control and monitoring of administrative expenses.
The Incentive-Investment Plan for John Hancock employees consisted of $2 billion in assets under management. Plaintiffs alleged losing tens of millions in returns. A settlement was reached in mid-2021 for $14 million plus procedural changes to the plan’s administration.
Another recent court decision paves the way for class action against the beauty brand Estee Lauder for its 401(k) plan’s fees. The suit was filed last year by the Edelson Lechtzin law firm in the U.S. District Court for the Southern District of New York.
The Estee Lauder plan had $1.65 billion in assets under management which led to the accusation that fiduciaries should have used their leverage to get lower fees. Another notable complaint was that plan administrators appeared not to have conducted a recordkeeping RFP since 2014 or earlier. Fees were said to be $48 to $126 per participant per year. Despite a strong defense citing the 2020 Supreme Court decision in Thole v. U.S. Bank, the case has been allowed to proceed.
Protecting Against Claims
These are just a few of the hundreds of cases of recent excessive fee lawsuit claims currently winding their way through the court system. For cases that survive a motion to dismiss, costs balloon exponentially, leading many fiduciaries to settle at great cost.
As an advisor, it’s important to take steps to protect yourself from the threat of excessive fee lawsuits. The first step is to understand this risk and take action to reduce your exposure.
It’s also crucial that you have the right insurance. Employee benefits liability coverage designed to cover clerical errors doesn’t protect against excessive fee claims. Even some professional liability policies for plan advisors may leave you with exposures.
That’s why Lockton Affinity Advisor offers 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.