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The big trend in 401 (k) lawsuits in recent years is for participants to sue plan sponsors and providers for excessive fees. ERISA requires that the trustees of a plan carefully research and choose among suppliers to ensure that the fees charged are not unreasonable or excessive and document this process. In addition to following best practices and exercising due diligence in this regard, plan sponsors are also considering fiduciary insurance as a means of mitigating risk.

To learn more about plan sponsor liability and risk, as well as to learn more about the role that fiduciary insurance plays, we turned to Dave Weller, EVP and Professional Lines Specialist at Amwins Brokerage and Daniel. Aronowitz, Managing Director, Euclid Specialty Managers for more information.

BenefitsPRO: Why do plan sponsors face increased exposure to fiduciary risk? What happens to cause this increased risk?

Dave Weller and Daniel Aronowitz: The pace of excessive fee lawsuits continues to increase, with nearly 100 cases filed last year, and we’re on track for even more this year. These lawsuits allege that the plan trustees failed in their fiduciary responsibilities to plan members to control plan record keeping and investment expenditures, or to prudently monitor the performance of the plan’s investments. Most of these lawsuits survive a motion to dismiss, resulting in significant pressure for resolution due to high litigation costs and the threat of high damages. Complainant companies have started targeting smaller plans, so all plan sponsors now face significant fiduciary risk with respect to plan fees.

How could ERISA lawsuits and excessive fees lawsuits impact the fiduciary insurance market? And why should sponsors prioritize mitigating these excessive fees?

With over $ 1 billion in settlements and several hundred million paid in attorney fees to law firms filing these cases, fiduciary liability insurers have made substantial changes in fiduciary renewals. Trust companies perform more underwriting diligence for renewals, including reviewing registrar fee transparency reports and analyzing record keeping and investment fees and plan performance.

Trust companies have lowered the limits they are willing to offer plans, and most plan sponsors will see higher premiums and retentions, possibly including even higher retentions for class actions or cost claims. excessive.

Some plan sponsors will have difficulty finding sufficient capacity to cover the high risk of excessive fee litigation. The most spectacular example of the evolution of the fiduciary market is that of a leading fiduciary insurer who now demands an excessive withholding of fees of $ 15 million for large plans.

Many plan sponsors rely exclusively on trust insurance as a risk management plan to fund and absorb losses. What proactive steps can plan sponsors take to avoid excessive fees?

Excessive fee litigation has set a higher fiduciary standard for controlling plan spending, and all plan sponsors must take positive steps to reduce their fiduciary risk profile. Most advisors recommend that plan sponsors follow a good investment policy and carefully document the reasons for their decisions.

But that is not enough to prevent your plan from being continued. Here are some guides to determining if your plan is at high risk for excessive fee litigation:

  1. whether your plan is in the retail share class of investment options when lower cost institutional share classes are available;
  2. whether your plan has an active series of target date investments;
  3. if your plan provides for a record keeping fee based on a percentage of assets with uncapped revenue sharing.

We recommend that plan sponsors take four positive steps to address each of these three risk factors:

  1. Make sure your record keeping fees are billed on a low flat rate per participant, and eliminate or cap any income sharing from investment options. Better yet, plan sponsors should consider paying the record keeping fee to eliminate this risk factor.
  2. Call for tenders every three years to bid on your record keeping to ensure the lowest possible plan administrative costs.
  3. Make sure that each investment option in the plan is the lowest possible institutional share class for each investment option.
  4. Make sure your plan offers low-cost index options for each investment class, and switch to target date index funds at the lowest possible fees for participants.

Do you have any additional tips to share with plan sponsors?

The risk of litigation demonstrates that plan trustees must take positive steps to control plan expenses. Given the increased risk environment, it would be wise for plan sponsors to hire an experienced consultant to review plan fees and investment performance each year. Even though your plan committee has diligently processed and documented a thoughtful process for lowering plan fees, you may still need an expert to adequately mitigate plan risks and lower fees.

Finally, carefully review your fiduciary responsibility program to ensure that key coverage is not removed or limited.

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