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Compliance June 11, 2021
Rush of Litigation Against Retirement Plans Expected to Continue
One insurer says the more than $1 billion in settlements thus far could make fiduciary insurance a thing of the past.
Reported by Lee Barney
There have been approximately 200 “cookie-cutter” Employee Retirement Income Security Act (ERISA) class action lawsuits filed against retirement plans since 2015, including more than 90 cases filed in 2020 alone, says Jon Chambers, managing director at SageView Advisory Group, in a recent white paper, citing numbers from an industry insurer.
This includes an increase in lawsuits against smaller plans—i.e., those with less than $100 million in assets and fewer than 1,000 participants.
With more “cookie-cutter” cases being filed, especially when the qualified default investment alternative (QDIA) is a “big ticket” target-date fund (TDF), Chambers writes, there is no sign of these suits slowing down.
All this has largely been due to what Chambers calls “the Schlichter Blitzkrieg,” referring to the barrage of lawsuits the Schlichter Bogard & Denton law firm filed against 401(k) plans and university 403(b) plans beginning in 2006. Several years later, in mid-2015, numerous other plaintiffs’ law firms began filing “copycat” style lawsuits against 401(k) plan fiduciaries and recordkeepers, generally following Schlichter’s “proof of concept” excessive fee claims, he writes.
“Over the past 15 years, ERISA fiduciary litigation in defined contribution [DC] plans has grown from a rare event … to a seemingly everyday occurrence,” Chambers writes.
‘Insurability Risk’
Amid the rush of litigation, fiduciary liability insurance underwriter Euclid Specialty says claims are so commonplace that fiduciary liability insurance could disappear.
“We have reached an inflection point in the war against [DC] plans because the risk has become virtually uninsurable,” Chambers says in his white paper, quoting a Euclid report. Thus, insurers to plan sponsors and plan fiduciaries are now beginning to talk about “insurability risk,” according to Euclid.
“Insurance companies have paid well over $1 billion in settlements, but this economic model cannot continue,” Euclid says.
For now, insurers are starting to hedge their exposure by considering reducing coverage and increasing retention, according to Euclid.
To protect themselves against ERISA litigation, which is “clearly significant for fiduciaries”—particularly when it comes to excessive fee cases—Chambers says, “thankfully, there are many strategies that plan sponsors can employ to mitigate ERISA litigation risk.”
Strong Governance Procedures
The wall of defense should start with “risk-mitigation strategies based on governance procedures,” Chambers says.
“Appoint a committee to oversee the plan’s fiduciary responsibilities,” he continues. “Define the duties of the committee in writing (via a committee charter) and have the committee review the duties and charter periodically. Have the committee develop, adopt and periodically review an investment policy statement (IPS), possibly with the assistance of an independent investment adviser. Hold periodic meetings (e.g., quarterly), distribute agendas and materials in advance, and prepare minutes that memorialize actions and decisions taken at meetings.”
Chambers goes on to say that it is also important to “consider involving qualified legal counsel in committee meetings/plan review process[es]” and to “ensure fiduciaries are properly appointed and appropriately trained.”
It is also smart for retirement plan committees to review fiduciary liability insurance coverage, ensure limits and deductibles are appropriate, and review communications from plan vendors to participants, he says.
Law firm Hanson Bridgett says plan sponsors can often avoid participant complaints through regular, clear communication. It adds that plan sponsors must be sure to “follow up on any participant complaints.”
Of course, sponsors must also have set procedures for monitoring service providers. Best practices, it says, include reviewing performance, including adherence to contractual performance standards; reviewing fees for reasonableness; and negotiating fees where appropriate.
All of this must be accompanied by a formal annual review process, and thorough plan document and operational compliance, the firm notes.
Plan sponsors should also be on the lookout for claims and appeals issues, as well as service provider issues, Hanson Bridgett says. Data security and fraud prevention are becoming more and more critical, for example.
Along the lines of data security, plan sponsors also need to have strict governance rules for committee meetings that are held remotely and should look for updates from the DOL on general fiduciary issues, the firm advises.
Legislative and Regulatory Priorities
Hanson Bridgett goes on to say that plan sponsors should also stay abreast of any legislative and regulatory changes. Priorities for this year include the possible passage of the so-called “SECURE Act 2.0,” and a potential new fiduciary rule from the Department of Labor (DOL), it notes. Both actions would have a big effect on the retirement plan industry and could also affect plan sponsors.
Environmental, social and governance (ESG) investing has also been a topic of hot discussion and changing guidance. Retirement plan experts say sponsors should continue to look for the latest guidance from the DOL if they are interested in using such investments.
Finally, the DOL is likely to issue continuing guidance on including private equity in employer-sponsored DC plans, the law firm says.
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