Excessive Fee Litigation: A New Hope

Excessive fee class action lawsuits continued to harass plan fiduciaries and the fiduciary liability insurance market in 2022, with 88 new suits filed. This was the second highest historical amount behind the 97 suits filed in 2020 and nearly twice the number of filings in 2021. These cases are costly to defend as they typically involve hundreds to thousands of plan participants over a several-year period. While no one individual claim may be material, the aggregate exposure can be substantial. To exacerbate matters, these cases have historically been difficult to dismiss. As a result, plan fiduciaries and their insurers have been forced to decide early in the litigation whether to bear the risk of further litigation or settle early—often at a premium. See our Fiduciary Liability Market Update for additional details on fee litigation and other issues impacting the fiduciary liability insurance market.

However, there is some good news. Recent court decisions in 2022 and 2023 are giving plan fiduciaries and their insurers hope that excessive fee litigation can be reined in.

This does not mean, however, that plan fiduciaries can now become complacent. With that in mind, this article includes some best practices both for trustees and for handling your fiduciary liability insurance placement process.

Excessive Fee Litigation Background

Excessive fee class actions refer to suits against fiduciaries of employer-sponsored retirement plans, such as a 401(k) plan, alleging the plan’s fiduciaries breached their duties under ERISA (Employee Retirement Income Security Act of 1974) by allowing plan service providers to charge excessive fees. Excessive fee suits allege that plan fiduciaries have a legal obligation to act in the best interests of plan participants, including ensuring that the fees charged by service providers are reasonable and necessary for the services provided. Excessive fee litigation has become increasingly common in recent years as plan participants have become more aware of the fees being charged to their retirement accounts and the impact those fees can have on their savings.

These numbers can add up to huge sums based on the number of plan participants and the time period over which the alleged excessive fees were charged to these plan participants.

Settlements are a way to avoid lengthy litigation. Some settlements, however, have been exceptionally costly:

• Lockhead (2015): $62 million
• Boeing (2015): $57 million
• Novant Health (2016): $32 million
• MassMutual (2016): $30.9 million
• Ameriprise Financial (2015): $27.5 million

Plaintiffs can extract these settlements in large part because excess fee cases are difficult to win on a motion to dismiss. Under ERISA, if a plaintiff’s complaint includes allegations that create a plausible inference of a breach of fiduciary duty and a resulting loss to the plan, the burden of proof shifts to the plan fiduciary to show the decision made was appropriate, prudent, and reasonable (the “plausibility standard”). This shifted burden forces plan fiduciaries to decide between incurring the enormous cost of discovery and the risk of an adverse outcome or settling and moving on.

The False Hope of Hughes

The US Supreme Court had the opportunity to rectify the motion to dismiss issue in Hughes v. Northwestern, which presented the Court an opportunity to elaborate on what the applicable pleading standard should be for bringing an ERISA-related imprudence claim. The Court issued a narrow, unanimous opinion remanding the case for further proceedings, passing on the opportunity to provide clarity on this issue that plan fiduciaries and insurers hoped for.

The decision, however, did provide useful lessons that lower federal courts have seized on in subsequent litigation. The Court stated that “[a]t times, the circumstances facing an ERISA fiduciary will implicate difficult tradeoffs, and courts must give due regard to the range of reasonable judgments a fiduciary may make based on her experience and expertise.” This language opened the door for lower courts to pivot to a more sensible approach when evaluating excessive fee cases at the pleading stage.

Kroger, a Promising Start

A recent case applied the lesson from Hughes and provides a new hope for plan fiduciaries and insurers to curtail seemingly meritless excessive fee litigation. On March 9, 2023, a District Court in the 6^th Circuit granted the defendants motion to dismiss in Lisa Sigetich et al. v. The Kroger Co. et al.

The issue under scrutiny was whether Kroger should have negotiated lower fees for plan recordkeepers. The suit alleged that the fiduciaries “breached the duties they owed to the Plan, to Plaintiff, and to the other participants of the Plan by, among other things: (1) authorizing the Plan to pay unreasonably high fees for recordkeeping services; and (2) failing to disclose to Plan Participants fees associated with the Plan.” The plaintiff contended that the $30/participant fee for recordkeeping services was higher than fees for comparable plans that paid $20/participant.

The court took issue with the plaintiff’s failure to allege how the plan’s recordkeeping fees were excessive when compared to the services provided. The court found that the “Plaintiff fails to allege that the Kroger plan’s recordkeeping fees were excessive when compared to services rendered” and “Plaintiff fails to give any context to the services rendered to the Kroger plan or to the services rendered to her comparable plans which may lead to the inference that the Kroger Plan's recordkeeping fees were excessive relative to the services rendered.”

What does this mean for plan fiduciaries going forward? It's good news. The Kroger decision is consistent with an increasing number of decisions (e.g., CommonSpirit Health, TriHealth, Inc., Oshkosh) that reject the notion that comparison of fees among plans based on nothing more than plan size is sufficient to survive the motion to dismiss stage. Plaintiffs must provide some context around the services rendered relative to the fee charge for the targeted plan and its comparables. Plaintiffs must also give some context around plan size and employee/participant count. The courts are now focused on process and context and not just what fees alleged equivalent plans are paying.

Best Practices for Avoiding Litigation

Good practices can also be a great way to avoid litigation, or—if you are sued—enhance the chance that the litigation will go away faster and for less money.

Plan fiduciaries should consider the following best practices:

• Evaluate and justify provider selection. The courts don’t say you need to choose the cheapest provider, but you must be able to give reasons for the providers you choose.
• Lean into third parties. Engage the services of third-party fiduciary professionals who add an independent voice to the conversation.
• Procedure is important. Follow a well-documented decision-making process showing that you operated with “care, skill, prudence and diligence under the circumstances then prevailing,” as required by ERISA.
• Document everything. Keep detailed records including meeting minutes of plan committees and details on why a lower-cost provider or investment option was not selected.
• Monitor and compare. Monitor fund performance and fees associated with third-party service providers such as recordkeepers and investment advisors. Compare those against the performance of other investment options and costs of other service providers on a frequent cadence. Go to market with an RFP when necessary.
• Obtain fiduciary training. Train, train, train—hold regular training and education sessions for fiduciaries.

When it comes to placing your fiduciary liability insurance, consider these best practices:

• Work with an expert. ERISA is a complex, nuanced field. The consequences of binding a poorly brokered policy can be enormous. You want to work with a broker who is aware of the issues and places a significant amount of this business directly with the insurance market.
• Start early. The fiduciary liability insurance placement is application driven. Complete the application early and have your broker reach out to the broader insurance market to generate competition.
• Plan to meet. It is not unusual for insurance underwriters to have additional questions about excess fees. Ask your broker whether it makes sense to host a meeting to answer these questions. This is an opportunity to elaborate on your responses and provide the underwriters additional information that highlights the expertise of your team, not unlike a D&O insurance underwriter meeting.
• Evaluate your options. Focus on the underwriting and claims handling expertise of the insurer(s) you select to write your policy. Evaluate different layer, limit, and retention options to find the most efficient program. Treat the renewal as a blank canvas.

Will Kroger Change the Fiduciary Insurance Environment?

The Kroger decision and other similar decisions following Hughes are good news for plan fiduciaries and fiduciary insurers alike. In recent years, it has been common for fiduciary liability prices to increase significantly. At the same time, there is decreasing capacity, and retentions have increased to six to seven figures for excessive fee or class action litigation—this is due to excessive fee losses that have crippled the profitability of insurers' fiduciary books.

It's too early to tell when rate and retention increases will be a thing of the past. Unfortunately, there are also recent decisions that are inconsistent with Kroger. However, given the prevalence of excessive fee litigation and its impact on the fiduciary liability market over the past few years, Kroger is welcomed news by fiduciary liability insurance buyers and insurers alike.