On July 2, 2021, the U.S. Supreme Court granted certiorari in Hughes v. Northwestern University, No. 19-1401, to address the pleading standard that applies to breach of fiduciary duty claims involving excessive fees and imprudent investments under the Employee Retirement Income Security Act of 1974 (ERISA). In the last several years, there have been hundreds of similar cases filed against corporate sponsors and fiduciaries of defined contribution plans formed pursuant to sections 401(k) and 403(b) of the IRC code, and the decisions in those cases have been inconsistent and unpredictable.
Excessive fee litigation hit an all-time high in 2020. With the more than 100 excessive fee cases filed in 2020 well surpassing 20191, insureds and carriers have been concerned that this could be the new normal. The 401(k) plan continues to be the most common type of employer-sponsored retirement plan provided by for-profit companies. Similarly, 403(b) plans have been the retirement vehicle designated for tax-exempt organization such as universities and non-profit organizations. Over the last several years, employers who sponsor these plans have been under intense scrutiny when it comes to the fees associated with them. Plan sponsors are at greater risk of litigation today than ever before with no retirement plan being exempt. Historically, excessive fee lawsuits have been directed at the larger pension plans where assets are in excess of $1 billion. This changed in recent years as plaintiff firms have extended their reach to include smaller-sized plans. The dramatic increase in ERISA class actions in 2020 was partially driven by the number of smaller plans being sued, including plans with under 1,000 participants and less than $100 million in assets.2
Even as lawsuits have increased so has the number of plaintiff firms filing these suits. Over the course of the last few years new plaintiff firms have entered this space, often filing a series of nearly identical “cookie-cutter” lawsuits using publicly available documents (such as form 5500 filings with the Department of Labor).3 It is the legal obligation of a plan fiduciary to protect the plan’s assets solely in the interest of plan participants and their beneficiaries. Plaintiffs in excessive fee cases assert that fiduciaries have failed in their capacity as such and have breached their fiduciary duty by failing to control administrative expenses, failing to manage investment fees and monitor investment performance. The emergence of new plaintiff firms, coupled with constantly evolving theories of legal liability, has made it difficult to predict which plans might draw unwanted attention.4 There are no definitive predictors, but plaintiffs are more likely to sue if they perceive some of the following characteristics relating to a plan: (1) failure to negotiate lower fees for services, (2) paying recordkeeping fees as a percentage of assets under management without a suitable cap in place, (3) offering too few or too many investment options and those that are too risky or too conservative, (4) favoring expensive actively managed funds, and (5) failing to use the least expensive mutual fund share classes available as investment options, to name just a few.5 Though a wide array of allegations are often pursued, the common theme remains that excessive fees have reduced invested assets and resulted in lower returns than would have otherwise been generated.
According to 401K Averages Book 21st Edition [latest edition], investment fees continue to trend downward.6 Though fees continue to decline, case counts have gone in a different direction. In an August 2020 Bloomberg Law article, a plaintiff lawyer stated a belief that COVID-19 may be partly responsible for the spike in fee litigation.7 The plaintiff lawyer speculated that with COVID-19 moving participants from traditional offices to home office environments, plan participants are having more time to dedicate to their retirement savings and inquire as to whether their investments and the expenses in their plans are appropriate.8 However, defense lawyers describe the process as more plaintiff lawyer-driven, starting with directed solicitations via social media (LinkedIn and/or Facebook).9
These cases have become not only numerous but also costly to defend and settle. Settlements have reached the tens of millions with little to no signs of letting up. It is estimated that fiduciary liability insurance companies have paid in excess of $1 billion in settlements and well over $250 million in attorney fees.10 The few cases which have gone to trial have been known to burn through primary layers of insurance on defense costs alone.
Up until now, the biggest problem for corporate sponsors and plan fiduciaries has been the lack of clear “standards” for when fees are considered excessive. Consequently, there have also been no clear consistent standards for getting these lawsuits dismissed, so no company can be certain they are fully protected from this type of litigation or a negative outcome. As a result, most cases have survived motions to dismiss with only a few lucky defendants succeeding in initial motions. As an illustration of the unpredictability of how courts approach excessive fee litigation, it should be noted that cases have been dismissed with alleged recordkeeping fees as high as $136 to $222 (Martin v. CareerBuilder, LLC, 2020 WL 3578022, at *1 (N.D. Ill. July 1, 2020) and $167 to $181 (White v. Chevron, 2017 WL 2352137, at *15), while other cases with much lower recordkeeping fees have survived motions (see, for example, George v. Kraft Foods Glob., Inc., 641 F.3d 786, 798 (7th Cir. 2011), allowing the class action to proceed where the recordkeeping fees were between $43 and $65 per participant).
The Northwestern case itself involved substantial recordkeeping fees, alleged to be between $153 and $213 per participant. Divane v. Northwestern University, 953 F.3d 980, 984 (7th Cir. 2020); cert. granted.
When one considers that the Northwestern and Kraft decisions both came out of the same appellate court (the 7th Circuit), it’s no wonder that plan fiduciaries and sponsors (and insurers) find excessive fee litigation to be daunting and unpredictable.
The plaintiffs in Hughes contended that the Northwestern University retirement plan paid too much for recordkeeping services by using multiple recordkeeping vendors, not soliciting bids for recordkeeping and not negotiating for fee reductions. The plaintiffs also alleged that the plan imprudently offered retail share classes of various mutual funds instead of less expensive institutional shares. The complaint alleged that as a result of the excessive fees, less money was available for investment and growth, costing the plaintiff class tens of millions of dollars in lost profits.
The Seventh Circuit affirmed the dismissal of the lawsuit on a motion to dismiss (briefed before but decided after full discovery in the case had proceeded), determining that the complaint failed to state a claim concerning the use of multiple recordkeepers (a characteristic unique to educational institutions offering TIAA investments) or the inclusion of retail share classes in light of the wide range of investment options offered in the plan. See Divane v. Northwestern Univ., 953 F.3d 980 (7th Cir. 2020). Courts in other circuits have reached differing conclusions on the plausibility of similar claims at the pleading stage.
It is difficult to predict how the U.S. Supreme Court will come down in this matter. On the one hand, the current Court is predominantly conservative and business-friendly, but on the other hand they requested input from the Acting Solicitor General, who filed a brief supporting the plaintiff class. It should be noted, however, that the Acting Solicitor General’s opinion had been sought primarily on the issue of whether there was a conflict among the circuits, a question which it should be apparent by now that the authors of this article would also have answered in the affirmative. In any case, it is unlikely that the Supreme Court render a decision before 2022.
Against this backdrop of uncertainty, fiduciaries and sponsor organizations should attempt to take proactive measures to reduce exposure related to excessive fee litigation.
When lawsuits strike, fiduciary liability insurance is the optimal mechanism for protecting companies and their employees from claims of fiduciary breaches. In the event of a claim, fiduciary liability insurance can defend and provides indemnification for covered losses. Such policies extend coverage for legal expenses and financial losses that the plan and/or its participants may sustain due to administrative errors or omissions, or breaches of fiduciary duty.
Though transferring risk via insurance is foundational, it’s equally important to implement risk prevention strategies. Since often court rulings hinge on whether fiduciaries followed a “prudent” process, Groom Law Group (a specialized benefits, retirement and health care law firm) provides the following recommendations:11
Excessive fee class actions continue unabated and at a pace that does not appear to be slowing down in 2021. Whether the volume is COVID-19 induced or just the result of opportunistic plaintiff firms, these cases serve as a reminder to plan fiduciaries to remain diligent in reviewing recordkeeping fees and monitoring plan investment options. Plan fiduciaries and sponsor organizations would be prudent to take affirmative proactive steps towards risk avoidance and risk mitigation in order to reduce potential exposure to this dangerous class of lawsuits.
Potential impact on clients: In a field of conflicting results and proliferating litigation that has had an adverse impact on Fiduciary liability insurance market conditions, the Supreme Court’s decision to hear the Hughes case creates the possibility that there could in the foreseeable future finally be some level of clarity for fiduciaries (and their insurers) over ERISA excessive fee pleading standards. It is difficult to predict which way the Court will lean, and it may decide the case on narrow grounds, but it is still probable that afterwards there will be some level of additional clarity concerning this high exposure area of law.
1 Fleckner, James O and Douglass, Alison O. “Q+A With Goodwin’s ERISA Litigation Group”. Goodwin Law, 31 March 2021, https://www.goodwinlaw.com/publications/2021/03/03_31-qa-with-goodwins-erisa-litigation-group.
2 Martin, Alison L. and Golumbic, Lars C. “The War on Retirement Plan Fees: Is Anyone Safe?” Chubb and Groom Law Group. May 2020.
3 Ibid
4 Ibid
5 Ibid
6 Valletta, Joseph. 401k Averages Book 21st Edition
7 Willie, Jacklyn. “401(k) Fee Suits Flood Courts, Set For Fivefold Jump in 2020.” Bloomberg Law. 31 August 2020.
8 Ibid
9 Fleckner, James O and Douglass, Alison O. “Q+A With Goodwin’s ERISA Litigation Group”. Goodwin Law, 31 March 2021, https://www.goodwinlaw.com/publications/2021/03/03_31-qa-with-goodwins-erisa-litigation-group.
10 Aronowitz, Daniel. “Exposing Excessive Fee Litigation Against America’s Defined Contribution Plans” Euclid Specialty. 3 December 2020.
11 Martin, Alison L. and Golumbic, Lars C. “The War on Retirement Plan Fees: Is Anyone Safe?” Chubb and Groom Law Group. May 2020.
Willis Towers Watson hopes you found the general information provided in this publication informative and helpful. The information contained herein is not intended to constitute legal or other professional advice and should not be relied upon in lieu of consultation with your own legal advisors. In the event you would like more information regarding your insurance coverage, please do not hesitate to reach out to us. In North America, Willis Towers Watson offers insurance products through licensed subsidiaries of Willis North America Inc., including Willis Towers Watson Northeast Inc. (in the United States) and Willis Canada, Inc.
