Administration August 16, 2018

Do You Have What It Takes to Obtain Fiduciary Insurance?

When assessing whether or not to take on a sponsor as a client, the insurers “have really sharpened their pencils,” says Nancy Ross, a partner and head of the Employee Retirement Income Security Act (ERISA) Litigation Practice at Mayer Brown.
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With litigation on the rise, experts say that it is more important than it has ever been for retirement plan sponsors to have adequate fiduciary insurance. And as a result of the increase in litigation, carriers have become more selective about sponsors they will cover.

“These are interesting times right now,” says Rhonda Prussack, senior vice president and head of fiduciary and employment practices liability at Berkshire Hathaway Specialty Insurance in New York. “There is a tremendous amount of class action litigation naming plan sponsors and their agents, particularly with respect to private company employee stock ownership plans (ESOP) and fees. None of this litigation seems to be slowing up. In fact, those claims are going more and more down market, particularly the fee cases. Everyone has to be aware of their fiduciary duties, make sure they have processes in place around these duties and work with an insurance broker to make sure they have adequate fiduciary insurance coverage in case they are sued.”

As to how much insurance a sponsor needs, generally 10% of the plan assets is a good rule of thumb, Prussack says. However, the sponsor has to consider the “size of the plan and the complexity,” she says. “That answer might change if the plan is an ESOP sponsored by a non-publicly traded company. It is not uncommon for companies with large plans with $1 billion or more in assets to purchase towers of insurance of $75 million to $100 million or more.”

A tower is created by coverage by several insurance carriers, explains Nancy Ross, a partner and head of the Employee Retirement Income Security Act (ERISA) Litigation Practice at Mayer Brown in Chicago. “If you want $100 million in insurance, you certainly might have different carriers,” Ross says. “Generally, one carrier will only provide up to a certain level of coverage, say up to $25 million. Then the next two might each cover $15 million apiece.”

While 15 years ago, fiduciary coverage was typically a rider to a company’s directors’ and owners’ (D&O) policy, fiduciary insurance coverage has since been carved out as a standalone, Ross says. If a sponsor thinks their D&O coverage extends to fiduciary insurance, they could be in for a surprise, she notes.

When assessing how much insurance to have, it is critical for sponsors to consider how high their defense costs could run, Ross says. “In a complicated ERISA class-action lawsuit alleging fiduciary breaches, your defense fees can run anywhere from $10 million to $20 million. So, if they run on the high side and you have a $50 million policy, will the remaining $30 million be enough to cover the cost of being hit with a judgement?”

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What fiduciary insurance carriers consider when assessing retirement plans

Should a company be turned down for insurance by one carrier, this would not put a Department of Labor (DOL) audit target on their back because the DOL would only discover that once an investigation had begun, Prussack says.

If a claim is made against a company, it could result in their being unable to obtain fiduciary insurance for several years, says Nathan Boxx, director of retirement plan services at Fort Pitt Capital Group in Pittsburgh.

When assessing whether or not to take on a sponsor as a client, the insurers “have really sharpened their pencils,” Ross says.

First and foremost, she says, “they are looking to see if there has been a history of litigation and claims filed against the company. The other big consideration is the company’s fiduciary governance structure. They want to see if there is a fiduciary committee in place and if the proper delegations are in place to give the committee the authority to run the plan. Is there an investment policy statement? How often do they meet? Do they have plan counsel and an adviser? All of these factors would arguable mitigate the risk of being sued.”

Prussack agrees: “Insurers really like to see that there is as much expertise as possible in running the plans. If they have a 3(21) or 3(38) fiduciary, we would view that as a positive. As ERISA requires that plan fiduciaries exercise an expert level of prudence and the folks managing their plans typically lack that level of expertise, we would view it as a positive.”

Berkshire Hathaway Specialty Insurance also looks to see “if the company is financially stable, whether there have been any DOL audits, or any delayed contributions to the plan. Those are typically the types of problems you will see in smaller plans,” Prussack says.

“With larger plans, we delve more deeply into the plan’s financial history and investments and how they are performing,” she adds. “We look at how robust their fiduciary process is for selecting and monitoring investments and third-party providers, whether it is the recordkeeper or the investment managers. We also delve deeply into how they assess fees to the plan and the participants. We look to see if there have been any changes to the plan that might upset participants, such as termination or annuitization of a defined benefit plan, a change in the investment lineup, a cut in retirement benefits or an increase in costs passed along to retirees. We really try to examine the totality of the risk and look for the kinds of behaviors that could trigger litigation or make participants upset.”

Other red flags that carriers look for are offering company stock in the plan or whether or not they are an investment firm offering proprietary funds, Ross adds.

As for what sponsors should look for when selecting a carrier, they definitely should get multiple quotes and bids, look at the carrier’s claims paying ability and frequently reevaluate their insurance coverage to ensure it is adequate, Boxx says.

“One thing I think is valuable is to look for a carrier that has operated in the space for a while and is familiar with the lawsuits,” Ross advises. “A good carrier will know the plaintiffs’ attorneys, how they operate and what they are looking for, be that a settlement or to push forward with the lawsuit. That can help the sponsor brainstorm for the best defense strategy.”
Administration August 15, 2018

Leveling the Playing Field for Participant Fees

Making participant plan fees more equitable.
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The concept of fee levelization is garnering attention from defined contribution (DC) plan sponsors and advisers, commencing from such sources as the increased volume of litigation over plan costs and the Department of Labor’s Employee Benefit Security Administration’s (EBSA’s) focus on fee disclosures.

 

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Michael Volo, senior partner at Cammack Retirement, explains, “With fee levelization the recordkeeper applies their recordkeeping fee as a percentage of assets, to each individual investment option. If revenue sharing in the investment option exceeds the recordkeeper’s required revenue, the recordkeeper credits each participant who has assets in the fund with the amount of the excess. If the investment provides less than the required revenue amount, the recordkeeper adds an additional fee, in the amount of the shortfall, to the accounts of each participant using the investment. A participant with several different investments might experience multiple credits and debits based on the revenue sharing in each investment, relative to the required revenue.”

 

Some plan sponsors and retirement plan providers remain perplexed by fee levelization. A 2017 Plan Sponsor Council of America (PSCA) report on non-profit employers found almost half of survey respondents were unaware of fee levelization, while only one in four plan sponsors could verify if their plan employed revenue-sharing to pay costs. 

 

Still, 33% of sponsors say they have already taken steps to ensure that fees are assessed to participants in a more equitable manner, according to Aon Hewitt’s “2016 Hot Topics in Retirement and Financial Well-Being.”

 

Michael Sasso, partner and co-founder of Portfolio Evaluation, stressed that it is a plan sponsor’s duty to consider fee levelization, even more now as firms face an upsurge in lawsuits. As companies are sued left and right over fees, plan sponsors must consider not if, but when, potential litigation can occur should certain plan costs be deemed too high or inconsistent, he says.

 

“In order to better protect yourself and get ahead of it, it would be wise for companies to really look at this, study it, and do what’s best for them. Have a process in place and make sure it’s well-documented,” he says.

 

Plan sponsors need to question how revenue sharing payments are applied towards each participant, Sasso says. The practice of revenue-sharing occurs when an investment company or manager pays a portion of funds to the recordkeeper, to decrease administrative service costs instead of paying a brokerage cash expense. Because revenue sharing differs with certain investments, participants invested in certain funds could end up subsidizing costs for participants in other funds, Sasso points out. The unparticipating workers, he says, end up “riding on the coattails of participants in funds generating revenue sharing.”

 

Volo believes the trend in fee levelization tackles this revenue sharing gap, and improves the situation participants, plan sponsors and recordkeepers are put in when remunerating these costs.

 

“It addresses that disparity and allows for revenue sharing to go back to participants, allows the plan sponsor to select the funds with the lowest net investment fees, and again, it’s a progressive fee, consistent with how investment fees are charged,” he says.

 

How participants are charged for these fees, from fee levelization to revenue sharing, can depend on the recordkeeper as well. Recordkeepers levelize fees differently from one another, and since it is a complicated process, not all recordkeepers offer the service.  

 

Other fees

 

Other fees can be levelized as well. Plan sponsors and advisers should consider whether participants should be charged at a ‘pro rata’ or ‘per capita’ model, Sasso says. “Pro rata means participants will pay a percent on their account balance, while with ‘per capita’ expenses, participants are charged equal dollar amounts. For example, if a sponsor were to charge each participant an annual per capita fee, say $75, a participant with a $5,000 account balance would be paying 1.5% of their assets, whereas a person with a $500,000 account balance would be paying a mere 0.02%. A ‘pro rata’ 10 basis-point fee for a participant with a $500,000 balance would result in $500 in plan fees, whereas a participant with a $5,000 balance would only pay $5. According to Volo, most advisers would suggest a per capita approach, or apply pro rata fees along with revenue sharing fee leveling.

 

“When that fee methodology is adopted, it lifts constraints off of selecting funds to provide certain revenue sharing to pay for the recordkeeping expenses, because there’s an explicit fee for recordkeeping,” he says. “So, often it allows plan sponsors and advisers to choose low or no revenue sharing funds, to reduce investment expenses to participants.”

 

Volo say plan advisers can help plan sponsors with fee decisions by requesting both pro rata and per capita prices from recordkeepers.

 

Participant reaction to fee levelization

 

For those DC plan sponsors worrisome over participant reaction—and education—concerning fee levelization, Volo explains how incorporating a questions and answers (Q&A) forum or a frequently asked questions (FAQ) portal could mitigate confusion. Some participants may not give the subject any attention, but most, he says, will address the resource should distresses arise. It’s the plan sponsors making an emphasis on fee levelization, he says, that typically generates the need for educational materials.

 

“Those who are interested have strong communication material provided during the rollout of fee leveling, including FAQs to address any concerns that participants have,” he says.

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