Insurance Marketplace Realities 2023 Spring Update – Fiduciary liability
April 28, 2023
Despite conflicting positive and negative risk developments and some carriers remaining wary, a few carriers with increased appetites are leading to improved market conditions.
Financial, Executive and Professional Risks (FINEX)
N/A
Rate predictions: Fiduciary liability
Trend
Range
Small public/nonprofit (defined contribution pension plan assets up to $50M)
Flat to +10%
Mid-sized public/nonprofit (plans asset $50M to $500M)
Flat to +15%
Large public/nonprofit (plan assets above $500M)
Flat to +30%
Financial institutions
-15% to +20%
Underwriters continue to be more wary of fiduciary risks than they were four years ago, but there has been considerable stabilization.
Underwriting focus: Despite conflicting positive and negative indications, a recent increase in the number of markets interested in writing primary fiduciary liability policies has contributed to the flattening of premium increases.
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 (some carriers don’t want to quote plans with assets above $1 billion).
Even smaller plans can cause concern because a few smaller plaintiff firms have targeted them. Insurers regularly seek detailed information about fund fees, record keeping costs, investment performance, share class, vendor vetting process and plan governance, causing some insureds to seek assistance from their vendors in filling out applications.
A wave of class actions filed by one law firm against sponsors whose 401k plans include BlackRock target date funds caused some carriers to focus on this exposure in their underwriting, although the BlackRock funds in question have been highly rated, and Morningstar.com published an article criticizing the lawsuits. However, the fact that the first two decisions in these cases have been dismissals has helped to calm the concerns of many insurers.
Carriers like to see:
Frequent RFPs/benchmarking
No revenue sharing
No retail share classes
Few actively managed funds, and not as qualified default investment alternative
Limited merger & acquisition activity
Retentions/sub-limits: Insurers continue to be more focused on retentions than on premiums. First-dollar coverage has become virtually 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. Some carriers have attempted 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 sub-limit of liability or exclude entirely prohibited transactions/excessive fees coverage, but there are sufficient alternatives available. Marketplace results will vary with plan asset size, plan governance and claim history, but it can be a challenge to get credit for positive risk factors.
Coverage breadth seeing some expansions: Other than increasing retentions, carriers have not generally been restricting coverage. It should be noted, however, that terms can vary substantially. Several carriers have become receptive to offering coverage enhancing endorsements.
Is the market improving? Yes. 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 alternatives (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 may be higher or lower depending 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 avoid increases entirely. We expect to see flat renewals continuing to be common. 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 now often seeing flat or reduced premiums on renewal.
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 was the result of a wave of excessive fee cases in these sectors in recent years. However, the lull in university suits has been helpful in that sector, while hospital systems remain challenged.
Underwriters continue to focus 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 it can be challenging to get credit for best practices.
Broader economic challenges could pose risks to benefit plans.
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.
Cutbacks in benefits (particularly retiree medical benefits) and/or workforces may lead to claims and potentially large class actions.
Entities that still sponsor defined benefit pension plans and saw their funding status improve substantially during 2021, have more recently seen declines in funding levels.
Litigation
In 2022, excessive fee claim frequency returned almost to 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. Excessive fee class action frequency hit a sudden peak in 2020 with almost 100 cases filed, then dropped 40% in 2021, then rose again in 2022 to 88 cases,1 with more than 100 cases ongoing. Several recent excessive fee settlements (not involving investments in defendant-sponsored proprietary funds) have been more modest (between $1 million and $5 million, mostly on the lower end) than previously. In the initial aftermath of the U.S. Supreme Court’s pro-plaintiff Northwestern University decision, few excessive fee cases were dismissed, but a recent positive precedent from the Sixth, Seventh and Eighth Circuits (CommonSpirit Health, Oshkosh and MidAmerican Energy Co. respectively, discussed below) have led to an increase in motions to dismiss being granted, particularly in those circuits.
Other types of class actions persist: Although fewer suits against defined benefit plans alleging reduced benefits due to the use of outdated mortality table assumptions were filed in 2022, such cases 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 remained virtually nonexistent for the last several years, but private companies with employee stock ownership plans (ESOPs) can still see claims: In the continuing aftermath of the U.S. Supreme Court’s decision in Fifth Third Bank v. Dudenhoeffer, very few employer stock drop class actions have been filed, and those few continue to be dismissed and affirmed on appeal. Nonetheless, carriers remain concerned about employer stock in plans; they will often exclude ESOPs or include elevated retentions. Meanwhile, private plaintiffs and the DOL sometimes bring claims against private companies with employer stock plans, mostly in response to valuation issues in connection with establishing or shutting down such plans. In 2022 the DOL reached settlements and recovered money for participants in a few ESOPs, including a $6.3 million recovery. See, e.g., ebsa20221219 and also ebsa20221027
Risks post the Dobbs decision: Following the U.S. Supreme Court decision in Dobbs v. Jackson Women’s Health Organization, overturning Roe v. Wade, some companies implemented protocols to assist employees in gaining access to healthcare services they may not be able to obtain in their own states. Fiduciary risks can arise as to possible violations of newly implemented state laws and related civil and criminal investigations and proceedings, raising questions concerning the scope of ERISA preemption. Some employee participants might complain about benefit cutbacks, while others might complain about discrimination. Plan sponsors may also face challenges complying with ERISA’s technical requirements in connection with plan changes and creation. However, it should be noted that these potential claims do not seem to have materialized to date.
Enforcement
Department of Labor enforcement results dipped in 2022: While enforcement and compliance actions brought by the DOL resulted in $1.4 billion being recovered in 2022, that number was down from the 2021 total of $2.4 billion. The DOL’s primary stated areas of focus continue to be delinquent contribution attribution and cybersecurity. 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. On the delinquent contribution front, the DOL has proposed changes to the Voluntary Corrections Program to allow for self-corrections for plans not currently under investigation.
DOL rulemaking
The Department of Labor’s proposed new rule regarding environmental, social and governance (ESG) investing achieved final rule status, despite opposition: On October 14, 2021, the Department of Labor (DOL) published for comment in the Federal Register a new rule to modify the previous administration’s 2020 rule that was perceived as discouraging retirement plans from investing in ESG-related investment options by putting a burden on fiduciaries to justify such investments. As the DOL explained in the Supplemental Information provided when they published the rule, the change was “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.”
On November 22, 2022, the DOL published the final rule and a summary fact sheet. The official press release was entitled: “U.S. Department of Labor Announces Final Rule to Remove Barriers to Considering Environmental, Social, Governance Factors in Plan Investments.” The final rule retained the core principle that the duties of prudence and loyalty require ERISA plan fiduciaries to focus on relevant risk-return factors and not subordinate the interests of participants and beneficiaries.
The new rule applies the same fiduciary standards to the selection and monitoring of a qualified default investment alternative (QDIA) as applied to other designated investment alternatives.
Days before the rule was about to go into effect (on January 30, 2023), 25 state attorneys general and three private plaintiffs sued to block the rule as beyond the DOL’s authority. Thereafter additional litigation was filed, and on March 1, 2023, Congress passed legislation under the Congressional Review Act to block the rule.
On March 20, 2023, President Biden issued the first veto of his presidency in order to keep the new rule in effect. On Thursday, March 23, a vote of 219 for and 200 against in the House of Representatives failed to reach the two-thirds majority required to override the veto.
Employee Benefits Security Administration (EBSA) request for information from interested parties: In relation to climate risk specifically, EBSA/DOL was considering going further than the ESG investing standard discussed above and asked for public input on how to implement a 5/20/21 Executive Order to protect pension plans from such risks. Under consideration were mandatory disclosures on Form 5500s or elsewhere concerning plan investment policies, climate-related metrics of service providers, plan fiduciary awareness of climate-related financial risk and much more. Responses were due by May 16, 2022. Evidently most of the comments were negative and EBSA/DOL has not taken any further action.
DOL interpretation of “investment advice” vacated by district court: In a release from April 2021, the DOL published its interpretation that advice concerning whether to roll over assets from an employee benefit plan to an IRA (with an anticipation of an ongoing future advisory relationship) can be considered as meeting the test of whether an advisor fulfills the “regular basis” requirement to create fiduciary status. In a decision in American Securities Ass’n v. United States Dep’t of Labor (No. 8:22-CV-330-VMC-CPT, 2023 WL 1967573 (M.D. Fla. Feb. 13, 2023)), the district court found the DOL interpretation to be arbitrary and capricious, reasoning that any post-rollover advice would not be fiduciary advice relating to an ERISA retirement plan.
Legislation
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 have been joining PEPs. Employers participating in PEPs will want to make sure that they have adequate appropriate insurance.
SECURE ACT 2.0: Securing A Strong Retirement Act (SECURE 2.0, Senate Finance Committee’s official summary here) was signed into law on December 29, 2022, with parts taking effect immediately and others being phased in over time.
The law expands automatic enrollment, as well as opportunities for making “catch up” contributions.
Among other things, SECURE 2.0 also enhances the retirement plan start-up credit, making it easier for small businesses to sponsor a retirement plan. The legislation further increases the required minimum distribution age to 75 and it allows employers to match employee student loan repayments with retirement account contributions.2 Contrary to expectations, however, the final version of the law does not allow non-profit 403(b) plans to offer collective investment trusts (CITs), which often have lower fee structures than mutual funds, as options.
Fiduciaries will have to educate themselves about the new playing field and facilitate passing on the benefits to their plan participants. Plaintiff class action lawyers will be prepared to second guess plan fiduciaries.
COVID-19 relief legislation: The American Rescue Plan Act (the Act), which was passed in March of 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. Many underfunded multiemployer plans have been funded as a result of the Act, including most notably the Central States Teamsters Pension Fund to the tune of $36 billion.
Aftermath of the U.S. Supreme Court’s decision in the Northwestern University excessive fee case
On January 24, 2022 the U.S. Supreme Court issued its eagerly awaited decision in the Northwestern University excessive fee case, finding for the plaintiffs, vacating the dismissal, remanding the case back to the Seventh Circuit.
The Seventh 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 Seventh Circuit’s uniquely extreme position on the “investment choice” defense.
Initially, after the Northwestern University decision, district courts became even more reluctant to dismiss cases on initial motion. More recently, however, the Sixth Circuit affirmed the dismissal of the excessive fee class action against CommonSpirit Health, the Seventh Circuit affirmed the dismissal of the class action against Oshkosh Corporation, and the Eighth Circuit affirmed the dismissal of a class action against MidAmerican Energy Co. The courts in all these cases stated that the Northwestern decision did not remove the requirement for courts to act as gatekeepers as to whether pleading standards are met in the first instance. The CommonSpirit and Oshkosh courts quoted the most pro-defense sentence from the Northwestern decision, which pointed out 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.”
All three circuit courts found that plaintiffs, despite having pointed to other allegedly comparable but better plans and investments, had failed to establish that they were in fact comparable and indicative of likely imprudence. The Seventh Circuit cited the Sixth Circuit’s detailed decision with approval, a trend which may continue in other jurisdictions. Also, within the Sixth and Seventh Circuits there have been submissions of supplemental authority and motions for reconsideration filed by defendants whose motions to dismiss were previously denied. For more detail, see these articles about the CommonSpirit Health and Oshkosh decisions.
Footnotes
1 The Key Fiduciary Liability Storylines of 2022 - Euclid Fiduciary
2 The provision of SECURE 2.0, which allows employers to make contributions to retirement accounts which match qualified student loan repayments does not become effective until after the 2023 plan year. This provision is expected to be especially popular if the legal challenges to President Biden’s student loan forgiveness executive order are ultimately successful.
Disclaimer
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 entities, including Willis Towers Watson Northeast, Inc. (in the United States) and Willis Canada Inc. (in Canada).
