As a general matter, the story of 2023 in fiduciary liability can be summed up as “2022 continued.” Although plan sponsors and fiduciaries saw both positive and negative litigation results and somewhat decreased claim volume, the big story continued to be excessive fee litigation. A wave of post-Dobbs abortion access litigation didn’t materialize. There was no major new legislation but rather continued interpretations and clarifications of existing laws. Rate and term trends also continued with their patterns from 2022, with flat renewals becoming more common.
In terms of what was new, 2023 did see two relatively new types of lawsuits, one type being brought against plan sponsors and another type being brought by plans and their sponsors. Four suits brought by one law firm against four different plan sponsors, alleging improper use of forfeited plan funds, may not ultimately result in plaintiff recoveries and a resulting trend. The second potential trend, suits by welfare benefit plans against service providers, doesn’t directly implicate fiduciary insurance since the plans are plaintiffs and not defendants.
2023 saw further stabilization in the fiduciary insurance market
In 2023, rates continued to increase but at a slower rate, with flat renewals becoming common. Some carriers had higher retentions just for excessive fee class actions, while others applied such retentions to all class actions. Class action retention for large plans continued to be in a range between $1 million and $5 million, and $5 million policy limits are the most common. The number of insurers with increased fiduciary appetite slightly exceeded the number of insurers who seemed to be cutting back.
Particularly with commercial and large nonprofit (university and hospital) risks, underwriters were focused on defined contribution pension plans with assets greater than $250 million, where previously the cut-off had been $1 billion (some carriers still won’t quote plans with assets above $1 billion). Even smaller plans have caused concern, because a few smaller plaintiff firms have targeted them.
Insurers continue to 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. After initial concerns about a wave of class actions relating to Black Rock investments (discussed below), insurers have become less focused on the issue as a result of the plaintiffs’ lack of success in the majority of the cases.
Excessive fee class action volume:
Excessive fee results in 2023 have been a mixed bag: On September 6, 2023, the Tenth Circuit affirmed the dismissal of the excessive fee lawsuit against Barrick Gold. In that 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.
However, note that on remand the 7th Circuit declined to dismiss the Northwestern University case again but rather allowed the Northwestern University case to proceed, finding that plaintiff's recordkeeping and share class allegations were sufficiently plausible (also distinguishing its previous decision in Oshkosh).
On November 14, 2023 the Second Circuit affirmed the grant of summary judgment to Cornell University in its excessive fee case. Although Cornell had been forced to go through discovery (and demonstrated a prudent procedure which resulted in reduced fees over the years), the Court wound up holding that, in relation to their prohibited transaction claim, plaintiffs should have been required in the first instance to plead the lack of a relevant exemption. This is in contradiction to other circuits which treat prohibited transaction exemptions as an affirmative fact-intensive defense on which defendants have the burden (including most recently by the 9th circuit in the AT&T class action). The AT&T decision was particularly controversial, since it found that renegotiating an existing recordkeeping contract was a presumptive prohibited transaction. Despite the filing of several amici briefs, the 9th Circuit declined to have an en banc rehearing. For more discussion concerning the implications of the Cornell University decision, please see Second Circuit decision offers new hope for defending prohibited transaction claims.
Defined benefit retirement plan developments:
U.S. defined benefit plan funding continues to improve: The WTW Pension Index continued to increase in October 2023, once again reaching its highest level since mid-2001.
Furthermore, in a January 2, 2024 analysis, WTW reported that it had “examined pension plan data for 358 Fortune 1000 companies that sponsor U.S. Defined benefit pension plans and have a December fiscal year-end date. The aggregate pension funded status of these plans at the end of 2023 is estimated to be 100%, two percentage points higher than 98% at the end of 2022.” This marks the first time that most U.S. defined benefit plans have been fully funded since 2007.
Welfare benefit plan developments:
Enforcement:
DOL rulemaking: The Department of Labor’s proposed new rule regarding environmental, social and governance (ESG) investing achieved final rule status in early 2023, despite opposition.
On October 14, 2021, the Department of Labor 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.”
Days before the rule was about to go into effect (on January 30, 2023), 25 (later 26) state attorney generals 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 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.
A federal government motion to move the state attorney general case to Washington D.C. failed. However the case was dismissed in September, 2023, with a Republican-appointed judge giving deference to the DOL interpretation but also agreeing that the rule was fundamentally neutral. This ruling has been appealed to the 5th Circuit.
Meanwhile, a similar suit filed in Wisconsin in February, 2023 by the Wisconsin Institute for Law and Liberty is still pending.
Legislation:
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 expanded automatic enrollment, as well as opportunities for making “catch up” contributions.
Among other things, SECURE 2.0 also enhanced the retirement plan start-up credit, making it easier for small businesses to sponsor a retirement plan (for more detail, see Secure 2.0 signed into law as part of 2023 federal spending package).
The legislation further increased the required minimum distribution age to 75 and it allows employers to match employee student loan repayments with retirement account contributions. 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 SECURE 2.0, including the student loan match, Roth catch-up contributions and Roth matching contributions. Another SECURE 2.0 enhancement which 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 within a participant’s individual account in a Defined Contribution plan.
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.
Defined benefit retire plans:
Defined benefit plans:
Welfare benefit plans:
Excessive fee suits could expand to welfare plans: In light of increased regulation and scrutiny concerning expenses and claim payment accuracy in relation to welfare plans, it is possible that plaintiffs will attempt to bring excessive fee cases against sponsors of welfare plans who are not diligent in negotiating and monitoring their fees. Any such attempted class actions will face serious challenges relating to standing, which have resulted in dismissal of claims against welfare plans in the past. Standing arguments would not work against the DOL, however, which is statutorily empowered to challenge any perceived breaches of fiduciary duty.
[Note that plaintiffs would be unlikely to attempt such claims against well funded defined benefit plans, in light of the clear U.S. Supreme Court precedent ruling against plaintiff standing in such cases, in the Thole v. U.S. Bank N.A. case.]
Underwriters will continue to seek substantial information about defined benefit plans, and may try to expand their inquiries to other plans, which could create substantial burdens for insureds and their brokers. Most underwriters will decrease their concern about Black Rock funds, as a result of plaintiffs in those cases being mainly unsuccessful.
Rates will reach a point of stability where the majority of policies will be renewing flat, with some deviations for healthcare entities and some financial institutions with proprietary investments (depending on the extent of prior increases).
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).
