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”). Paying too much for administrative and record-keeping services.

Some ERISA fees lawsuits also allege that the plan sponsor did not eliminate underperforming investments from the funds being managed. Another common accusation is that the plan sponsor did not choose lower cost share classes (such as institutional stocks) for the investment menu.

An industry practice known as “revenue sharing” has also been criticized. In this case, a fund manager could share fees with a record-keeping service to cover unrelated marketing expenses.

Taken together, the fees allegedly hurt plan participants by reducing the return they would otherwise get from their retirement funds.

The Chubb / Groom report indicates two emerging trends in excessive fee litigation:

• First, the types of plans you are targeting are changing. The excessive fee cases began in 2006 and initially targeted large retirement plan sponsors such as Lockheed Martin, Northrop Grumman, Caterpillar, General Dynamics, and International Paper. Now plaintiffs are filing claims against many types of retirement plans, including multi-employer plans, 403 (b) plans used by tax-exempt organizations, and defined benefit plans.

• Second, smaller retirement plans are getting more and more blamed in a case of excessive fees.

One reason for the increase in cases, according to the report, may be the natural evolution of the excessive fee litigation strategy. As a small number of law firms succeeded 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 investigation – served to provide smaller plaintiff firms that subsequently entered the market with many of the resources they needed to formulate action Similar.

Characteristics of funds earmarked for cases of excessive fees

There are several common industry practices that can 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:

• Do not negotiate lower rates for services, either initially or periodically.

• Base payment as a percentage of the funds being managed, rather than a fixed price per participant

• Shortage of index funds offered to participants

• Offer funds that are too risky or too conservative

• Maintain funds underperforming an index or benchmark

Recommended Actions for Retirement Fund Managers

According to the report, plan sponsors could reduce their risk of litigation with the following types of actions:

• Conduct a periodic RFP process to solicit proposals from multiple record-keeping and administrative service providers.

• Establish an industry benchmark for certain expenses to maintain competitive performance metrics.

• Review your plan investments regularly and eliminate any poor performance.

• Seek guidance from independent experts in fiduciary liability and pensions.

• 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 generally does not apply to an excessive fee case. Plan sponsors are encouraged to work with insurance and legal experts to identify appropriate levels of insurance coverage, especially since plan fiduciaries may be held personally liable if it is determined that fiduciary obligations are not being met.

Significant Excess Fee Case Settlements

Litigation involving fees can take many years to resolve, which can be costly in terms of litigation costs and settlement fees. Some notable settlements for excessive fee litigation are listed below.

• Citigroup settled a $ 6.9 million settlement in a 401 (k) excessive fee case after more than a decade of litigation (2018)

• MIT settled a 403 (b) college plan for $ 18.1 million in 2019

• Northrop Grumman settled $ 16.75 million in a 401 (k) excessive fee case (2017)

• Vanderbilt University agreed to a $ 14.5 million cash settlement on a 403 (b) in April 2019

These are just a few of the many settlements reached in ERISA fee litigation matters.