The basic claim in fee-related litigation cases, most of which are filed as class action lawsuits, is that the plan sponsor is violating the Employee Retirement Income Security Act of 1974 (“ERISA”) by paying too much for recordkeeping and administrative services.
Some ERISA lawsuits over fees also allege that the plan sponsor failed to remove poor-performing investments from the funds being managed. Another common allegation is that the plan sponsor failed to choose lower-cost share classes (like institutional shares) for the investment menu.
An industry practice known as “revenue sharing” has also been criticized. In this instance, a fund manager might share fees with a recordkeeping service to cover unrelated marketing expenses.
Collectively, the fees allegedly harm the plan participants by reducing the return that would otherwise be earned on their retirement funds.
The Chubb / Groom report indicates two emerging trends in excessive fee litigation:
- First, the types of plans being targeted is changing. Excessive fee cases started in 2006 and initially targeted large retirement plan sponsors like Lockheed Martin, Northrop Grumman, Caterpillar, General Dynamics, and International Paper. Now plaintiffs are filing claims against many types of retirement plans, including multiple employer plans, 403(b) plans used by tax-exempt organizations, and defined benefit plans.
- Second, smaller retirement plans are increasingly being named as the defendant in an excessive fee case.
One reason for the increase of cases, according to the report, may be the natural evolution of the excessive fee litigation strategy. As a small number of law firms became successful with what was initially a novel basis for legal action, other law firms took note. The library of materials generated by the first wave of excessive fee cases-in the form of complaints, pleadings, motions, and legal research-served to give smaller plaintiff firms that subsequently entered the market many of the resources they needed to formulate similar actions.
Characteristics of Funds Targeted in Excessive Fee Cases
There are several common industry practices that might result in a plan sponsor being subject to litigation, according to the Chubb / Groom report. These actions include but are not limited to the following:
- Failure to negotiate lower fees for services either initially or on a periodic renewal basis
- Basing payment as a percent of funds being managed, rather than as a flat price per participant
- Shortage of index funds offered to participants
- Offering funds that are either too risky or too conservative
- Keeping funds that underperform relative to an index or benchmark
Recommended Actions for Retirement Fund Managers
According to the report, plan sponsors might be able to reduce their litigation risk with the following types of actions:
- Undertake a periodic RFP process to solicit proposals from multiple recordkeeping and administrative service providers
- Establish an industry benchmark for certain expenses to maintain competitive performance metrics
- Review plan investments on a regular basis and eliminate any poor performers
- Seek guidance from independent fiduciary liability and pension experts
- Identify and document the reasoning behind fiduciary decisions
Risk avoidance is always a priority in managing a plan subject to ERISA regulations. For this reason, the Chubb / Groom report also recommends that plan sponsors have adequate levels of fiduciary liability insurance. Employee benefits liability coverage alone typically does not apply to an excessive fee case. Plan sponsors are advised to work with legal and insurance experts to identify suitable levels of insurance coverage, particularly since plan fiduciaries might be held personally liable if it is determined that fiduciary obligations are not met.
Significant Excessive Fee Case Settlements
Litigation involving fees can take many years to resolve, which can be expensive in terms of both litigation costs and settlement fees. Some notable settlements for excessive fee litigation are noted below.
- Citigroup agreed to a $6.9 million settlement in a 401(k) excessive fee case after more than a decade of litigation (2018)
- MIT settled a university 403(b) plan for $18.1 million in 2019
- Northrop Grumman reached a $16.75 million settlement in a 401(k) excessive fee case (2017)
- Vanderbilt University agreed to a $14.5 million cash settlement in a 403(b) in April 2019
These are just a few of the many settlements reached in ERISA fee litigation matters.