Rate predictions: Fiduciary
|
Trend |
Range |
| Commercial/nonprofit (defined contribution pension plan assets up to $50M) |
 |
+5% to +15% |
| Commercial/nonprofit (plans asset $50M to $500M) |
|
+15% to +45% |
| Commercial/nonprofit (plan assets above $500M) |
|
+20% to +50% |
| Financial institutions |
|
+10% to +25% |
Key takeaway
Increases in premiums have moderated slightly, particularly for insureds who saw double-digit increases last year, but class action retentions remain high, with continued upward pressure. A U.S. Supreme Court decision may override lowered claim frequency and severity trends. Nevertheless, the currently limited market for primary fiduciary shows some signs of slight expansion.
Underwriters continue to be wary of fiduciary risks, but there has been some stabilization.
- Underwriting focus: Although there were only about 44 excessive fee class actions filed in 2021, down from almost 100 in 2020 (Miller, B. (2022, January 27). New 401(k)-fee suit filings plummeted last year. Ignites.), and most recent settlements have been below $5 million (previously most settlements exceeded $10 million), carriers are still concerned about the unpredictability, high costs of defense and substantial number of still pending cases. The U.S. Supreme Court’s pro-plaintiff ruling in the Northwestern University excessive fee case (discussed below) disappointed insureds who hoped that a victory for the defense could reverse the negative pricing trends in fiduciary liability; although the Court’s holding was very narrow, most carriers have seen it as a justification for continued tough terms and possible escalation.
- Particularly with commercial and large nonprofit (university and hospital) risks, underwriters are focused on defined contribution pension plans with assets greater than $250 million, where previously the cut-off had been $1 billion. Now some carriers don’t want to quote plans with assets above $1 billion.
- Even smaller plans cause concern, now that a few smaller plaintiff firms have targeted them. Insurers are seeking detailed information about fund fees, record-keeping costs, investment performance, vendor vetting processes and plan governance, causing some insureds to seek assistance from their vendors in filling out applications.
- Retentions/sub-limits: Insurers are even more focused on retentions than on premiums. First-dollar coverage has become almost impossible to obtain. Increased retentions of seven figures remain commonplace for specific exposures, e.g., prohibited transactions/excessive fees and sometimes all mass/class actions, with at least one carrier insisting on eight-figure retentions. Carriers are attempting to push retentions even higher, but insureds who already have seven-figure retentions have generally been successful in resisting increases. Even the non-class action retentions are generally six figures now (previously five figures). Some insurers may only offer a sublimit of liability or exclude entirely prohibited transactions/excessive fees coverage. Marketplace results will vary with plan asset size, plan governance and claim history, but it is a challenge to get credit for positive risk factors.
- Coverage breadth remains steady: Other than increasing retentions, carriers have not generally been restricting coverage. It should be noted, however, that terms can vary substantially. Many carriers are still receptive to offering coverage-enhancing endorsements.
- Blended coverage: Many organizations, including financial institutions and private/non-profit companies, continue to buy fiduciary liability coverage as part of a package policy, which in some cases has softened the marketplace challenges.
- Is some relief in sight? A little. While some carriers have all but left the market and others have expressed little interest in writing new business, some traditional financial line markets that have not historically written much fiduciary risk have begun to provide limited alternatives on a case-by-case basis (particularly if there are related primary D&O opportunities). Most carriers are closely monitoring the capacity they are putting out, and $5 million primary limits are now more common than $10 million.
- Rate prediction qualification: Rate increases depend on the insured’s existing pricing. Insureds who have already had at least one round of double-digit percentage premium increases may be able to keep increases to a range of +5% to +15%. Price per million of coverage can vary substantially among risk classifications, notably those involving plans with proprietary funds.
Many accounts are still viewed by carriers as challenged, particularly in certain industries.
- Challenged classes include financial institutions with proprietary funds in their plans, whether currently or in the past, especially if they have not yet been the subject of a prohibited transaction claim. However, financial institutions without proprietary funds in their plans and/or who accept relevant exclusions and/or already have elevated premiums are seeing smaller increases.
- In the nonprofit space, large universities and hospitals have seen some of the most substantial premium and retention increases and have struggled to find placement. This is the result of a wave of excessive fee cases in this sector in recent years. However, a lull in university suits has been helpful in that sector, while hospital systems remain severely challenged.
- Underwriters continue to be focused on such issues as excessive revenue sharing, uncapped asset-based vendor compensation, expensive retail share class investments, expensive actively managed funds, lack of regular benchmarking and RFP processes. Some carriers are nervous about potential insureds who have recently improved their processes but might be attractive targets for plaintiff firms who would make allegations about the prior period.
- Virtually any organization may be treated as risky by some carriers and, as mentioned above, it can be challenging to get credit for best practices.
Broader economic challenges may be increasing risks, but low unemployment and favorable stock market performance are positives.
- Underwriters have focused on defined contribution plan risks and have not paid as much attention to other types of plans, especially health and welfare plans. However, this could change if economic uncertainties accelerate these risks.
- Uncertainties include the pace of post-pandemic business reopenings and shifts in the work force. If new COVID variants arise, the market could harden further.
- Cutbacks in benefits (particularly retiree medical benefits) and/or workforces may lead to claims and potentially large class actions.
- As a result of favorable economic factors, entities that still have defined benefit pension plans saw their funding status improve from an average of 88% at the end of 2020 up to 96%.
Litigation has dropped from a 2020 high but could resurge; legislative and regulatory changes create uncertainty.
- In 2021, excessive fee claim frequency dropped significantly from its 2020 highs: For over a decade, a growing number of plaintiff firms have been suing diverse public, private and non-profit entities, making allegations involving allegedly excessive investment and/or recordkeeping fees that resulted in reduced investment principle and reduced returns; many of these class actions also alleged sustained periods of underperformance by specific investment options. Although three times more cases were filed in 2020 alleging breaches of fiduciary duty involving excessive fees than were filed in 2019 — substantially more than in prior years as well — it appears that only 44 such cases were filed in 2021 (less than 50% of 2020 volume). Also, although most previous settlements exceeded $10 million (ranging up to $62 million), several recent settlements have been well under $5 million. Carriers, however, have generally not acknowledged the frequency and severity drops or tempered their increases accordingly, and recently have been using the pro-plaintiff decision in the Northwestern University case as a justification for tougher terms.
- Other types of class actions persist: Suits alleging reduced benefits due to the use of outdated mortality table assumptions continue to be litigated, as well as class actions involving COBRA notice deficiencies or improper benefit reductions.
- Employer stock class actions against public companies have died down, but private companies’ ESOPs can still see claims: In the continuing aftermath of the U.S. Supreme Court’s decision in Fifth Third Bank v. Dudenhoeffer, 573 U.S. 409 (2014) very few employer stock drop class actions have been filed, and those few continue to be dismissed. Nevertheless, carriers remain concerned about employer stock in plans; they will often exclude employer stock ownership plans or include elevated retentions. Meanwhile, class actions against private companies with employer stock plans, mostly arising from valuation issues in connection with establishing or shutting down such plans, continue to be filed occasionally and are seldom dismissed on early motion.
- The U.S. Department of Labor (DOL) may now bring cases that were previously time-barred: The DOL achieved a decision that it is generally entitled to a six-year statute of limitations (as opposed to the three-year limitation period, which is triggered by “actual knowledge” of a violation of ERISA) in which to bring a claim, even if information from which a breach could have been detected was included in a Form 5500 filed with the DOL. The Court did, however, caution that the DOL could not rely on the longer statute of limitations if it was “willfully blind.” (Walsh v. Bowers, 2021 WL 4240365 [D.C. Hawaii, Sept. 17, 2021])
- The DOL has launched several plan cyber audits: In April 2021, the DOL issued guidance providing tips and best practices to help retirement plan sponsors and fiduciaries better manage cybersecurity risks. Not long after, the DOL initiated many audits regarding retirement plan cybersecurity practices and has continued to do so.
- The DOL’s proposed new rule reinstating an “all things being equal” standard to environmental, social and governance (ESG) investing awaits final rule status: In October 2021, the DOL published for comment a new rule modifying the previous administration’s 2020 rule that sought to discourage retirement plans from investing in ESG-related investment options by forcing fiduciaries to justify such investments. The change is “intended to counteract negative perception of the use of climate change and other ESG factors in investment decisions caused by the 2020 Rules, and to clarify that a fiduciary’s duty of prudence may often require an evaluation of the effect of climate change and/or government policy changes to address climate change on investments’ risks and returns.” Pursuant to the new proposed rule, plan fiduciaries would be allowed to consider collateral benefits of ESG investing on a tie-breaking “all things being equal” basis and may also consider that ESG risks can directly affect financial interests as well. The proposed rule would apply the same fiduciary standards to the selection and monitoring of a qualified default investment alternative (QDIA) as applied to other designated investment alternatives, including permitting consideration of ESG factors notwithstanding that such decisions could be politically controversial. The 60-day comment period on the proposed new rule ended in December, but the rule has not yet achieved final status.
- Pooled employer plans (SECURE Act): The Setting Every Community Up for Retirement Enhancement Act (SECURE Act) amended provisions of federal law, including ERISA, to establish a new form of multiple employer plan (MEP) called a pooled employer plan (PEP), which allows employers to join and delegate both investment and plan administration fiduciary obligations to pooled plan providers (PPPs). PEPs and PPPs need to ensure that they have sufficient and appropriately tailored fiduciary liability insurance to address emerging exposures contemplated in PPP/PEP arrangements. A slowly increasing number of small employers are joining PEPs.
- COVID-19 relief legislation: The American Rescue Plan Act (the Act), which was passed in March 2021, has been providing pandemic-related financial support to families as well as temporary COBRA and Affordable Care Act subsidies. The Act also extended funding stabilization for single-employer pension plans, modifications to executive compensation rules, as well as financial assistance for certain multi-employer pension plans. So far, the Act has resulted in large payments to two critically underfunded multiemployer pension funds.
U.S. Supreme Court decides Northwestern University excessive fee case for plaintiffs.
- On January 24 the U.S. Supreme Court issued its eagerly awaited decision in the Northwestern University excessive fee case, finding for the plaintiffs and remanding the case back to the 7th Circuit.
- The 7th Circuit had affirmed a holding that dismissed the case, which arose from the offering of allegedly imprudent investment options, solely because plaintiffs were offered other indisputably prudent investment choices. The Supreme Court’s decision rejected the 7th Circuit’s uniquely extreme position on the “investment choice” defense.
- Plaintiffs and carriers are likely to try to paint this decision as devastating for excessive fee defendants, but in fact it doesn’t move the ball at all (whereas a pro-defendant decision could have been very helpful to plan sponsors). The decision simply stands for the proposition that excessive fee class actions are potentially viable claims if pled with sufficient specificity.
- Unfortunately, the decision does not provide meaningful additional guidance concerning what constitutes sufficient specificity to establish a plausible pleading other than cautioning future courts 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.”
Buyers should keep on an eye on key loss drivers.
- Excessive fees: Excessive fee cases continue to drive loss development, although the number of such suits in 2021 was only 50% of the volume in 2020, and recent settlements have been low. The U.S. Supreme Court’s pro-plaintiff decision in the Northwestern University case is being used by most carriers as a justification to continue to increase premiums and attempt to push retentions higher.
- Financial institutions: Excessive fee claims against financial institutions often include allegations that plan participants were disadvantaged due to conflicts of interest if a plan sponsor included its own overpriced investment options in the plan; such claims tend to settle for substantially more than class actions without such alleged conflicts of interest.
- Any sized plan can be a target: Although the first excessive fee cases seemed to focus on specific industries and plans whose assets exceeded $1 billion, in recent years it appears that no plan is safe. Various public, private, multiple employer and nonprofit entities have been sued, and even plans with assets below $100 million have been targeted (although suits against plans with assets below $1 billion have not resulted in any eight-figure settlements).
- M&A: Carriers may apply increased scrutiny to insureds with substantial merger and acquisition and/or spin-off activities, which can lead to changes in benefits and related complaints.
- No claim yet? Not so fast: Organizations that have not been the subject of claim activity may not necessarily be viewed as a better risk. Particularly for financial institutions with proprietary funds in their plans, currently or historically, insurers may assume that a proprietary fund-related claim is likely at some point. In general, carriers are aware of ERISA’s long statute of limitations (six years) and are therefore more concerned with past practices than they might be in connection with other policies.
- Limit adequacy: With excessive fee litigation pushing claim frequency and severity, buyers should be vigilant in reevaluating limit adequacy. With the fiduciary market remaining hard, some insureds have been tempted to cut the size of their towers, but arguably this is the wrong time to take such short-term measures. It might be challenging to add capacity, but opportunities are still available.
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