Defense Attorneys Can Put Up a Fight in Excessive Fee Lawsuits

An insurer speaks out about why the majority of excessive recordkeeping fee claims are ‘bogus.’

The majority of retirement plan excessive fee lawsuits not only include claims of excessive investment management fees, but also allege that plan recordkeeping and administrative fees are too high.

Many plan sponsors have been pressured to settle these lawsuits to avoid costly litigation expenses. Euclid Fiduciary, a fiduciary liability insurance underwriting company for employee benefit plans, contends that is the goal of plaintiff law firms: to survive a motion to dismiss and then leverage settlement pressure based on high discovery costs and inflated damage models. 

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Euclid has published a white paper, “Debunking Recordkeeping Fee Theories in ‘Excessive’ Fee Cases,” discussing what it says are the common misleading tactics used by plaintiff law firms to allege excessive plan administration fees. For example, the paper notes that in most cases, data is pulled from Forms 5500 filed with the Department of Labor, which include an inflated number for recordkeeping and administrative fees. The Form 5500 fee data includes transaction fees beyond plan recordkeeping, and Euclid says plaintiff attorneys know this.

“That’s one of the main points we’re trying to make in the paper,” Daniel Aronowitz, managing principal and owner of Euclid Fiduciary, and author of the white paper, tells PLANSPONSOR. He gives the example of one plan’s Form 5500 that shows its provider is paid $6 million for recordkeeping, while the fee disclosure statements provided to plan sponsors and participants show the $6 million total includes $4.8 million in revenue sharing rebates.

“Bogus” is a word Aronowitz uses often when speaking about excessive fee claims. And he says the lawsuits’ presentation of “comparator plans is totally bogus.”

“The plans might be similar, but the parties have no clue about the services provided,” Aronowitz says. “A plan with low fees might not receive the same services as another plan—not all services received are the same, that’s the problem.”

The whitepaper notes that the Supreme Court held in Hughes v. Northwestern that all excessive fee claims based on circumstantial evidence must be subjected to context-based scrutiny in order to survive as a plausible lawsuit. Euclid urges the courts to demand accountability by requiring that all excessive fee lawsuits use the true plan fees and investments from regulated fee disclosures.  In addition, the insurer urges that the actual fees must be judged against valid, third-party fee benchmarks, and not plaintiff-contrived comparators.

Aronowitz says the purpose of the white paper is to give perspective on low-fee plans versus high-fee plans and those using a prudent process. He also notes that Euclid feels defense attorneys are treating every case the same. “We’re telling them not to do that,” he says. “Courts need to be told when claims are implausible. Defense lawyers can fight suits where plan sponsors have done [requests for proposals] and followed their fiduciary duties. Fight in those cases.”

Aronowitz points out a “catch-22” presented by some lawsuits: In some cases, plan sponsors have followed a fiduciary process and made a change they felt would be better for participants, and plaintiff law firms have claimed that the change is evidence that the fiduciaries knew something was wrong. “Those plan sponsors shouldn’t be sued,” Aronowitz says. “If they’re allowed to be sued, no one is safe.”

Aronowitz says the Employee Retirement Income Security Act’s statute of limitations can create a huge problem. He adds that the Form 5500 database is 1.5 to two years behind, so plaintiffs’ attorneys are always looking back. “[Attorneys] should be sanctioned for bringing frivolous lawsuits against someone that is doing the right thing,” he says.

Aronowitz caveats that some plans do have high fees and a lawsuit might be legitimate. The paper makes this point as well. But, Aronowitz says, the paper aims to provide context on which cases defense attorneys should file a motion to dismiss and which they should not.

“Based on what we see, judges cite our content [in decisions], so we put out information hoping judges and law clerks see it,” he says.

A Note About High Insurance Expenses

One consequence of excessive fee lawsuits, and particularly of the number that have been settled, is that fiduciary liability insurance costs have increased. Euclid Specialty has said claims are so commonplace that fiduciary liability insurance could disappear. “Insurance companies have paid well over $1 billion in settlements, but this economic model cannot continue,” Euclid notes.

Aronowitz says some statistics show there’s been nearly $2 billion in settlements paid out; “that’s like 2% of insurance industry capital.” He explains that there are two components of fiduciary liability insurance coverage that have been affected: retention costs and coverage amounts. Retention cost is a dollar amount specified in a liability insurance policy that must be paid by the insured before the insurance policy will respond to a loss.

“Retention has gone up,” he says. “For example, it used to be the largest plan sponsors would pay nearly nothing in retention costs, but now they might pay 15%. If you have a large plan, you’re likely to pay $2.5 million or so. So, basically, plan sponsors have skin in the game now and are paying much of the settlement amounts.”

As plan sponsors are renewing their policies, they might find the coverage limits are cut in half. “A plan sponsor might pay the same premium, but for a lower coverage amount,” Aronowitz explains.

“We want plan sponsors to know we are not the bad guy,” he says. “Costs had to go up because the world has changed. Good plans are being sued, and we didn’t get enough money to pay out settlements.”

Retirement Plan Participants Need Help With Retirement Income

From in-plan to out-of-plan, guaranteed or not, retirement plan sponsors have many options and many decisions to make.

Outliving their assets is cited by individuals as a top fear about retirement in multiple studies throughout the years.

“Eventually people will retire and will need some help with income,” says David Will, senior financial adviser at CAPTRUST in Allentown, Pennsylvania.

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From systematic withdrawals from defined contribution plans to annuities that guarantee a certain income stream in retirement, there are a range of options for plan sponsors to help participants create and manage retirement income. Will suggests that, whether considering an in-plan or out-of-plan income solution or not, plan sponsors should proactively change their plan design to allow systematic withdrawals—periodic or installment payments.

“We’re hearing more from plan sponsors about the need for and interest in retirement income solutions,” says Joel Schiffman, head of intermediary distribution at Schroders in New York City. “I think the challenge remains what direction they should go. It seems everyone’s looking but no one is sure of the right method to take.”

In-plan options are getting more attention these days both because of the Setting Every Community Up for Retirement Enhancement Act and plan sponsor preference for keeping retirees’ assets in the plan, says Michelle Richter, executive director at the Institutional Retirement Income Council, in New York City. She notes that the preference to retain retiree assets has changed from 10 years ago when most did not want to do so. When recently polled, 70% of plan sponsors indicated they do. “This is one reason plan sponsors are seeing a need to create a retirement tier in their plans,” she says.

Another impetus for retaining retiree assets and offering income solutions for them is the Department of Labor’s point of view on rollovers, according to Richter. “Its establishment of PTE 2020-02 signals it wants to prevent rollovers because participants can access less expensive solutions via the plan, and the DOL said in the last year that retention of assets in-plan is a top priority,” she says.

In-plan retirement income solutions that exist range from guaranteed minimum withdrawal benefits, or GMWBs, which is the most flexible and maintains market participation throughout the investment lifecycle, to qualified longevity annuity contracts, or QLACs, which guarantees a nominal amount of retirement income at a certain age in the future. Richter says the range of in-plan solutions are set by those two limits: a GMWB is the most liquid and offers the greatest level of market participation, and a QLAC is the least liquid and offers the lowest level of market participation.

“The challenge is trying to make sense of the alphabet soup of options,” says Richter. “Plan fiduciaries are going to need to become educated on these solutions and what their responsibilities are.”

To help plan sponsors decide which solution to offer participants, Broadridge Fi360 Solutions, Cannex, and Fiduciary Insurance Services have created a consortium that offers two prongs of activities to enable plan sponsors and advisers to become knowledgeable about the choices, says Richter, who helped to create the consortium. “Education on a monthly basis for at least a year and a half is free to plan sponsors and advisers,” she says.

The second prong is to establish objective metrics around each offering to determine which retirement income solution fits plan participant characteristics, Richter explains. “Whether a workforce has longer tenure employees or shorter tenure employees, skews older or younger, as well as their different saving attributes all matter in the process of evaluation for the appropriate retirement income solution,” she says.

“The objective of the consortium is to relay one appropriate process to evaluate which solution is best for a plan, given its attributes,” Richter adds.

As an example, Richter says one product exists that gives accumulation credits. The longer a participant is in that product, the greater the accrual experience towards the rate at which they can annuitize assets. “The product has a unique design where it is more useful for a plan sponsor that has a workforce that tends to be longer tenure,” she explains.

“Knowing the characteristics of each product will help plan sponsors understand how the product will work for its participants,” she says.

Schiffman notes that since the SECURE Act was passed, there’s been a proliferation of retirement income products, but nothing has really caught on at this point. “There is no silver bullet. I think as products come out and plan sponsors dig deeper, they’ll offer multiple options to plan participants,” he says. “Maybe they’ll offer some combination of guaranteed and not guaranteed solutions. The idea of having insurance doesn’t appeal to everyone, and guarantees sound good, but they are costly and complex.”

Retirement Income Options for DC Plan Participants
Systematic Withdrawals
  • in-plan
  • no guarantee
  • can increase payments or take additional payment
Guaranteed Minimum Withdrawal Benefit (GMWB)
  • in-plan
  • guaranteed
  • can take additional payment but future payments are reduced
Managed Account With an Income Component
  • in-plan
  • guaranteed if annuitization is offered
  • can take additional payment if not annuitized
Managed Payout Fund
  • in-plan
  • no guarantee
  • payments adjust up or down with the market
  • can take additional payment
Target-Date Fund With an Annuity Component
  • in-plan
  • guaranteed if annuitized at retirement
  • can take additional payment if not annuitized
In-Plan Annuity Product
  • in-plan
  • guaranteed
  • cannot take additional payment
Annuity Purchase/Bidding Service
  • out-of-plan
  • guaranteed
  • cannot take additional payment


The Decision Tree

When thinking about retirement income, there’s a decision tree that will lead plan sponsors down different paths, says Will.

Before considering specific products, plan sponsors must decide whether they want to offer solutions within the plan or outside of it, and they can do both, he says. An example of an out-of-plan solution is an annuity supermarket. Will says Hueler Income Solutions is one such option. It gives participants access to a universe of insurers offering annuity quotes at a low cost.

He notes that most of CAPTRUST’s clients are considering in-plan solutions.

The next tier of the decision tree is whether the plan sponsor wants to offer an integrated or a standalone solution, Will says. He explains that integrated means an income solution within a target-date fund or a managed account.

Among standalone retirement income options, there are guaranteed or not guaranteed solutions. An example of a solution that is not guaranteed could be a core bond fund that provides yield, or a managed payout fund offered by an investment provider, he says.

An example of a guaranteed solution is Prudential’s IncomeFlex product. Will explains that it guarantees a minimum payout once a participant makes the decision to annuitize his benefit. A GMWB is essentially the same—it guarantees at least a minimum amount of payment based on a participant’s ending account balance—however, a participant is not annuitizing, he is electing to get income.

A GMWB generally allows for flexibility, Will says. For example, if the payout is $1,000 a month, but the participant has an unexpected expense and needs more, he can generally go in and take more out, he explains. However, if the participant takes more, future payouts are reduced. Investments in a GMWB stay in the market and continue to earn. Will says the investment at retirement is usually 50% stocks/50% bonds, or 60/40, and if it earns enough, the participant can have the minimum withdrawal amount increased on his next birthday.

With options that participants have to annuitize, flexibility is gone, Will says. So, it’s important when a participant makes an election to distinguish whether it is to annuitize or to get income.

A GMWB can also be associated with a TDF—no longer a standalone solution, but an integrated one. “Now some off-the-shelf TDFs have these incorporated,” Will says. “It usually starts to get incorporated at age 50 and builds up to the retirement date.”

Will says integrated solutions might be preferred over standalone solutions because they would likely get more use from participants. “Standalone [solutions] would get less participant take up most likely due to participant inertia,” he says. “Plan sponsors needs to discuss whether they want people to widely use a solution or make a choice to use it.”

Will says there are also a few TDF strategies being developed that include an annuity option. He says they usually start at age 50 to allocate some of a participant’s assets into the income solution, and at retirement age, the participant can annuitize that portion of the fund. Will explains that when a participant does that, that portion of assets leaves the plan and goes to an insurance company, which will provide a certain stream of income.

Plan sponsors must also consider fees, says Will. “Guaranteed products come with extra costs, so plan sponsors should evaluate whether the extra cost is justified by the guarantee that’s provided,” he says.

Finally, Will says, plan sponsors also must think about portability. He explains that many products are proprietary to a plan’s recordkeeper and are not available across all recordkeeping platforms, and some products are developed by particular investment advisers that might not be made available on every recordkeeping platform. “What happens if the plan sponsor changes to a new recordkeeper?” Will says.

He notes that portability might not be an issue plan sponsors have to consider in the future. “The industry is working on that, but in my opinion, it will take about five years to make progress,” he says.

When looking at any solution, plan sponsors should consider consistency, flexibility and durability, Schiffman says.

“Retirees are used to a regular paycheck and have budgeted and planned around that,” he says, when explaining consistency. “A retirement income solution should take someone’s accumulated savings and provide a consistent stream of income like a paycheck to supplement Social Security. The solution should reduce the likelihood of significant drawdowns of a retiree’s assets, and it should adjust for inflation.”

Concerning flexibility, Schiffman says life throws curve balls; there’s the potential that things might come up during retirement—for example, a health crisis—that creates unplanned expenses. “Sponsors should ask whether the solution provides liquidity without penalty or additional fees,” he says. “They might also think about portability. If participants leave the plan, can they move the product with them?”

Noting that surveys show people’s greatest fear is outliving assets, Schiffman says that when considering durability, plan sponsors need to determine whether a solution will provide income potential for someone who outlives life expectancy.

“I think at different levels all solutions make sense,” Schiffman says, adding that he believes guaranteed income will have widespread appeal. “However, we like drawdown strategies. Our solution is built on drawdown strategies. Payments last for 20 years and at that point, the participant can decide whether to continue to draw down or reinvest in an immediate annuity.”

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