Could you be sued for excessive fees? No matter how careful you are, the answer is probably yes. Unfortunately, cookie-cutter excessive fee suits are still a major risk for RIAs and others in the FI space. Here are 15 of the most common ways financial professionals end up getting sued.
1. The Asset-Based Fee Suit:
You have worked with the same recordkeeper for several years. Fees have been low, and you believe you are upholding your fiduciary duty. But you get sued by a plan participant because this recordkeeper charges asset-based fees rather than per-participant-based fees. The legal complaint argues that the fee basis alone represents a failure to negotiate, control and minimize the plan’s administrative expenses.
2. The Revenue-Sharing Fee Suit:
You work with a reputable recordkeeper to administer a large plan. This vendor offers funds in a range of share classes, company stock and self-directed brokerage options and even a group annuity policy. But participants sue because the vendor incorporates some of its administrative fees into certain investment costs — this is revenue-sharing, and some call it an improper practice proving unfair excessive fees are borne by some or all plan participants.
3. The Neglected RFP Fee Suit:
You’ve worked with a particular recordkeeper for about six years. Informally, you’ve kept an eye out for lower-cost options, but haven’t come across any that suit your particular plan needs. Even so, you find yourself facing an excessive fee lawsuit because you haven’t been conducting a full, competitive RFP bidding process for administrative services on a regular basis to show a public, overt effort to take advantage of the lowest industry fee rates.
4. The Go-Between Recordkeeper Fee Suit:
You work with a recordkeeper’s related company to provide a portion of the administrative services for your plan. However, you end up getting sued since the related company is considered a go-between recordkeeper, resulting in multiple active recordkeepers charging potentially overlapping fees for the plan. The lawsuit argues this means higher fees and lower account accumulations for plan participants.
5. The Lowest Share Class Fee Suit:
You believe it would be beneficial to offer a range of options for plan participants, including retail as well as institutional funds, so you offer all of these options to your participants. But you get sued when some participants claim excessive and unreasonable investment management fees were charged because you failed to offer the lowest-costing share classes available from the investment company to your plan’s participants.
6. The Less Expensive Investment Fee Suit:
You believe you are upholding your fiduciary duties since you are carefully monitoring and managing your plan’s investment fees and determine that they are low by industry standards. However, you still get sued by a participant because, while these fees are low, there exists an even less expensive investment option available which was not offered to the participants.
7. The Performance Benchmark Fee Suit:
You believe you are providing a high level of service to the plan’s participants. You monitor investment results and note positive returns that meet or exceed industry benchmarks. But you wind up getting sued anyways, with some participants claiming poorly performing investment options according to the plaintiff legal counsel’s own carefully selected performance benchmark.
8. The Underperforming Proprietary Funds Fee Suit:
Your plan happens to belong to a notable employer that wishes to offer its own proprietary fund as one investment option for its plan participant employees. After careful due diligence, you can’t see the harm in letting the sponsor’s employees benefit from the fruits of their own labor. However, you are sued by some plan participants after the proprietary fund in question underperforms.
9. The Any Proprietary Funds Fee Suit:
In another case, your notable employer’s plan wishes to offer its own proprietary fund options for plan participant employees — so you do due diligence, allow it as an option and its investors enjoy best-case positive returns. But you are still sued, however, by a group of plan participants, not because they lost money in the company fund, but simply because it was offered as an option for them to invest in to begin with!
10. The Appropriate Investment Fee Suit:
You take great care to select appropriate investments for plan participants in all investment categories. You do all appropriate due diligence, observe all industry benchmarks and carefully monitor fees and investment returns. However, you are sued by a participant for failing to choose an appropriate investment option within a particular investment category which has been carefully singled out by the plaintiff’s legal counsel, such as your choice of either a stable value or money market fund as the capital preservation option. (Whichever one you picked, they say it was the wrong one.)
11. The Capital Preservation Fee Suit:
You are aware of a situation in which an RIA you knew faced a lawsuit claiming investment underperformance over their choice of stable value funds, so you opt to go with a reputable money market fund as your plan’s capital preservation option. But unfortunately, you face a lawsuit for this choice, with the participant’s counsel noting that the money market option was offered in lieu of a stable value fund option, another common claim in fee suits. (Complaints have targeted advisors in both scenarios.)
12. The Active Underlying Fee Suit:
After careful consideration, you decide to offer plan participants some investment options that involve active underlying investments. While these funds come with higher fees, you see a potential for better returns for those comfortable with the option. However, you face a lawsuit for offering these options with active underlying holdings, with a participant’s legal counsel claiming that participants are not receiving any value for these higher fees and are losing out on potential investment returns.
13. The Active Only Fee Suit:
With so many RIAs being sued for underperforming investments, you determine that you can offer the best mix of value and performance by offering plan participants a slate of options with actively managed underlying holdings. However, you face a lawsuit for this reason, with a group of participants complaining that you improperly selected only actively managed investments which did not provide enough value for their higher fees and are more expensive than other options you could have chosen.
14. The Too Many Options Fee Suit:
Many RIAs wary of a lawsuit will think that the more options they provide to plan participants, the better. That way, there will be something for everyone: active and passive options, stable value and money market funds, a range of lowest-cost share class options, even alternative investment options. However, this, too, can commonly result in a fee suit. Participants can sue claiming that a plan offered too many investment options, causing confusion and leading to indecision. With many investments offering price breaks for greater participation, this can also be an angle of the legal case, where participants were potentially denied the benefit of these volume discounts due to so many options diluting participation.
15. The Other Than Cheapest Fee Suit:
A financial professional may aim to offer plan participants a range of options that suit various risk tolerances and personal financial goals. However, many RIAs discover that they can be vulnerable to a lawsuit simply on the basis of offering anything at all as an option other than the absolutely cheapest share class available to participant investors. While these and other types of excessive fee suits may seem frivolous, they can be costly to defend, even when they are baseless.
The Need for Excessive Fee Suit Protection
In the era of cookie-cutter excessive fee suits, advisors face risks around every corner. When your every move following standard industry best practices can be second-guessed, it can feel like it’s a darned if you do, darned if you don’t. But advisors are especially darned — if they don’t have the right insurance.
The industry expertise of Lockton Affinity Advisor means you can get ERISA-compliant Errors & Omissions insurance made just for advisors. With decades of experience specializing in insurance solutions for professionals in the FI space, we offer protection, benefits and service that covers you in ways competitors cannot.
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