Despite conflicting positive and negative risk developments and some carriers remaining wary, a few carriers with increased appetites are leading to improved market conditions.
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Rate predictions: Fiduciary liability
Trend
Range
Small public/nonprofit
Flat to +10%
Mid-sized public/nonprofit
Flat to +15%
Large public/nonprofit
Flat to +30%
Financial institutions
-10% to +10%
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.
Despite conflicting positive and negative judicial decisions and a mostly unacknowledged drop in excessive fee class actions in the first half of 2023 (21 compared to 41 in H1 2022 and 89 for the year), a recent increase in the number of markets interested in writing primary fiduciary liability policies has been the main driver of a flattening of premium increases, with many accounts renewing flat (sometimes after threats to increase the premium).
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 now 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 were highly rated and Morningstar.com published an article criticizing the lawsuits. However, the fact that the first four decisions in these cases have been dismissals (in two cases, two successive dismissals) has helped to calm the concerns of many insurers. Carriers look for:
Frequent RFPs/benchmarking
Little or 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. Efforts by some carriers to push retentions even higher have usually been successfully resisted. Even the non-class action retentions are often six figures now (previously five figures). 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. While hospitals continue to be targeted, new university suits have not been filed and so scrutiny can be expected to lessen in that sector.
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 that 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 2023, excessive fee claim frequency dropped from high 2022 volume. For over a decade, a growing number of plaintiff firms have been suing diverse public, private and non-profit entities, alleging 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. However, excessive fee class action volume was down in the first half of 2023, with only 21 cases filed. This is about a 50% drop from 2022, which had 41 suits filed in the first half and a total of 89 class actions filed during the year. Excessive fee class actions have been up and down since they reached a peak in 2020 (101) followed by a substantial drop in 2021 (to 60). Several recent excessive fee settlements (not involving investments in defendant-sponsored proprietary funds) have been 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 recent positive precedents from the Sixth, Seventh, Eighth and Tenth Circuits (CommonSpirit,
Oshkosh, MidAmerican Energy Co. and Barrick
Gold 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 2023, 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 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 employer stock ownership plans or include elevated retentions. Meanwhile, private plaintiffs and the DOL sometimes bring claims against private companies with employer stock plans, mostly arising from 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.
In 2023, private company ESOP claims continued to be filed, and at least one substantial settlement ($8.7 million) was reached.
Risks post-Dobbs. Following the U.S. Supreme Court decision in Dobbs v. Jackson Women’s Health Organization, overturning Roe v. Wade, some companies implemented protocols through their health and welfare plans to assist employees in gaining access to healthcare services they may not be able to obtain in their own states. Fiduciary risks could 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 could also face challenges complying with ERISA’s technical requirements in connection with plan changes and creation. However, these potential claims do not seem to have materialized to date.
Enforcement
Department of Labor enforcement results dipped in 2022, results not yet available for 2023. 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 stated areas of primary 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 DOL’s proposed new rule regarding environmental, social and governance (ESG) investing achieved final rule status, despite opposition. On October 14, 2021, the DOL published for comment 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 in the Federal Register, 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 titled: “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 attempt 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 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.
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 (see, for example, the responses from the State of Utah and from the Securities Industry Financial Markets Association); EBSA/DOL has not taken any further action.
DOL drops its appeal of district court decision vacating its interpretation of “investment advice.” 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, which is one of the current five prongs necessary 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. On May 15, 2023, the DOL dropped its appeal of the district court’s decision. This decision is likely to affect other pending cases and may lead to the DOL proposing an amendment to its five-part test.
Legislation
SECURE Act: There has been a slowdown in the growth of pooled employer plans (PEPs) which were created as a result of the SECURE Act, with approximately 170 registered PEPs at the end of 2021, about 300 at the end of 2022 but only an increase of 50 during the first half of 2023. This may be partly attributable to a February 2022 clarification from the DOL and IRS that PEPs with more than 100 participants are subject to government audit (not the 1000 threshold many expected).
SECURE ACT 2.0: Securing A Strong Retirement Act (SECURE 2.0) 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.
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.* 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.
However, many ERISA practitioners remain uncertain about certain practical details relating to the actual implementation of some provisions of SECURE 2.0. The ERISA Industry Committee (ERIC) sent an open letter to the Department of the Treasury and Internal Revenue Service on June 8 asking for clarification on various provisions of SECURE 2.0, including the student loan match, Roth catch-up contributions and Roth matching contributions. Another SECURE 2.0 enhancement that awaits IRS regulations for additional clarity in its operation is section 127, the pension-linked emergency savings account (PLESA) provision, an optional feature which sponsors can adopt to allow for an employee-funded account embedded in a participant’s individual account in a defined contribution plan. Amid all the uncertainty, it is possible that plaintiff class action lawyers may be preparing to second-guess plan fiduciaries.
Relatedly, on August 10, 2023, the DOL filed a request for information, seeking public feedback and comments on those and other issues relating to SECURE 2.0.
COVID-19 relief legislation: The American Rescue Plan Act (the Act), 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. A July 14, 2023 Press Release from the Treasury Department stated that the data “demonstrates that governments have used this American Rescue Plan funding not only to prevent cuts in government services and respond to the immediate health and economic consequences of the pandemic, but also to make much-needed investments to strengthen their economies and their communities over the long-run.”
*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 in the aftermath of the U.S. Supreme Court’s decision blocking President Biden’s student loan forgiveness executive order.
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 and 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. Later in 2022, 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. On September 6, 2023, the Tenth Circuit affirmed the dismissal of the excessive fee lawsuit against Barrick Gold. 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 four 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 CommonSpirit Health and Oshkosh.
In the Barrick Gold case, the Tenth Circuit upheld as proper the district court's consideration of documents which were not included in the
complaint (most of which had been referenced
therein). Most other courts have been unwilling to consider on a motion to dismiss documents that were not provided by the plaintiff in its complaint, but the Tenth Circuit found it appropriate to consider “documents that the complaint incorporates by reference,” “documents referred to in the complaint if the documents are central to the plaintiff's claim and the parties do not dispute the documents' authenticity” and “matters of which a court may take judicial notice.” Since the additional documentation contradicted the plaintiff's allegation, the Tenth Circuit agreed with the district court that the allegations were not plausible. If more courts allow for the submission
of such supplemental documentation, that could
lead to further dismissals.
Recent trials result in defense victories for Yale University and B. Braun Medical Inc. On June 28, 2023, in a rare jury trial, Yale University succeeded in achieving a defense verdict. Although the jury found that Yale fiduciaries “breached their duty of prudence by allowing unreasonable record-keeping and administrative fees” to be charged to participants, they determined that plaintiffs did not prove any damages because “a fiduciary following a prudent process could have made the same decisions as to record-keeping and administrative fees as the defendants.” The August 18th B. Braun Medical judicial decision was more straightforward, resulting in affirmative findings that the plan fiduciaries were objectively prudent.
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).
