IMR 2025 – Fiduciary liability

Rate predictions: Fiduciary liability
	Trend	Range
Commerical (defined contribution or benefit plan assets up to $50M)		-5% to +5%
Commerical (plans asset $50M to $500M)		Flat to +5%
Commercial (plan assets above $500M)		-5% to +5%
Financial institutions		-5% to +5%

Slight improvements as more insurers are looking to build their books

Underwriting focus: Some carriers have recognized that excessive fee filing volume has continued at a lower pace in 2023 and the first half of 2024 compared to the high volume in 2022, resulting in some pricing relief.
A recent increase in the number of markets interested in writing primary fiduciary liability policies has been the main driver of modest decreases in premium, though more accounts have been renewing flat. Continued low filing volume could lead to somewhat more reductions in 2025.
Particularly with commercial and large nonprofit (university and hospital) risks, underwriters apply enhanced scrutiny to defined contribution pension plans with assets greater than $250 million, with some carriers avoiding plans larger than $1 billion. Even smaller plans can cause concern because a few smaller plaintiff firms have targeted them, but some carriers are now easing up on retentions for such plans.
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. Carriers look for frequent RFPs/benchmarking, little or no revenue sharing (with caps), little or no retail share classes, few actively managed funds (not QDIA), limited M&A activity.
Recent excessive fee class actions involving a health and welfare plan have caused increased scrutiny on such plans.
Recently brokers have had some success in getting credit for positive risk factors, including level of delegation, quality of advisors and favorable venues.
Retentions: Insurers continue to be more focused on retentions than on premiums. Although retentions of seven figures remain commonplace for specific exposures (prohibited transactions/excessive fees) and sometimes applicable to all mass/class actions at certain plan asset thresholds, there have been improvements. Some carriers are offering opportunities to “buy down” retentions somewhat.
Coverage breadth is 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.
Capacity management: Most carriers are closely monitoring the capacity they are putting out, and $5 million primary limits continue to be 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.

Challenged classes

Healthcare entities, who continue to be targeted disproportionately by class action plaintiffs, continue to see premium increases up to 10%, although some are renewing closer to flat.
Universities are less challenged now due to the lack of recent class actions filed against them.
Financial institutions still receive extra scrutiny, especially if their plans use proprietary funds, but their premiums have become stable and even decreased recently.
Carriers have mostly ceased to penalize funds with Black Rock investments since nine of the 11 original suits were dismissed (although two of the cases have survived motions to date, with one case surviving summary judgment and heading to trial after class certification was granted subject to interlocutory appeal).
Risks to watch include excessive fee class actions, imprudent fund selection class actions (particularly relating to target date funds), claims challenging use of funds from plan forfeitures, COBRA class actions, class actions challenging ESG investments, DOL investigations and cyber audits, potential claims arising from benefit cutbacks, claims alleging imprudent DB plan buyouts.

Developments and market-driving issues

Defined contribution plan excessive fee class actions

Only 23 excessive fee class actions were filed in the first half of 2024, on pace with the 48 filed in all of 2023 — but a sharp decline from 88 filed in 2022.
In the initial aftermath of the U.S. Supreme Court’s pro-plaintiff Northwestern University decision in January 2022, few excessive fee cases were dismissed, but subsequent positive precedents from the Sixth, Seventh, Eighth and Tenth Circuits (CommonSpirit, Oshkosh, MidAmerican Energy Co. and Barrick Gold respectively) led to an increase in motions to dismiss being granted, particularly in those circuits.
Appellate decisions have been a mixed bag. In one case in February, the Second Circuit upheld a grant of summary judgment, largely because the district court judge as a trier of fact had considered all of the facts adduced and concluded that there was evidence that the defendants employed “a robust process to manage potential conflicts of interest.”
In another case, the Fifth Circuit reversed a dismissal. The main issue was share class, the type of allegation which is least frequently dismissed on initial motion. The court didn’t accept the proffered justification for utilizing expensive retail share classes, namely that there was revenue sharing which purportedly made the investments less expensive on a net basis.
Trials: 2024 has seen three trials relating to target date funds (investment options designed to grow more conservative as investors age), all of which resulted in victories for defendants. Plaintiffs lost two cases involving FlexPath target date funds which allegedly underperformed. Despite numerous allegations of conflicts of interest among the defendants, ultimately the two courts found no liability. A third case involving different target date funds also resulted in a no liability verdict.
Yale University’s trial victory last year is currently being appealed to the Second Circuit, with the ERISA Industry Committee (ERIC) and U.S. Chamber of Commerce filing amici briefs in support of Yale.

Health and welfare plan excessive fee class actions

On February 5, 2024, a Johnson & Johnson employee filed a proposed class action alleging that J&J employees have been overcharged for prescription drug benefits. The complaint alleges that non-defendant Express Scripts, J&J’s pharmacy benefit manager (PBM), drastically overcharges for prescription drugs, providing several purported examples. The lawsuit is structured similarly to defined contribution retirement plan excessive fee litigation, alleging that J&J’s failure to negotiate lower prices constitutes a breach of its fiduciary duties under ERISA.
The claimant seeks to make the health plans whole (despite not having brought the suit on a derivative basis), plus “surcharge,” a form of equitable relief for herself and the purported class. She also brings a count on her own behalf seeking $110/day statutory penalties for failure to provide requested plan information on a timely basis.
The primary defenses are likely to be based on standing, arguments which have previously been successful in prior class actions relating to health plan costs.
This suit was filed against a backdrop of recent amendments which made section 408(b)(2) disclosure requirements applicable to welfare benefit plans in addition to retirement plans, as well as a trend of welfare plans becoming more aggressive in suing their third-party administrators to access complete employee medical claim data and ascertain whether they are owned money.
On July 30, 2024, the same plaintiff firm filed an almost identical second suit against another large public company, also focusing on the price of prescriptions from Express Scripts.

Other litigation

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 2024 so far, private company ESOP settlements have ranged from $1.25 million to $19 million.
Although Black Rock imprudent investment cases have been mostly unsuccessful, two of the 11 filed cases are proceeding: 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. These complaints didn’t allege excessive fees; in fact, these plaintiffs criticized the defendants for focusing on cost over performance. Although the vast majority of these cases have been dismissed, two have survived motions to date, with one case surviving summary judgment and heading to trial after class certification was granted subject to interlocutory appeal).
Litigation arising from pension buyouts: In the midst of positive news about defined benefit pension plan funding and a rise in plan sponsors arranging with insurers for buyouts of their pension liabilities (in order to gain access to the surpluses), plaintiffs have filed class actions against four plan sponsors who have arranged for such transactions. The defendants may have strong defenses to plaintiff’s efforts to achieve standing based on a stated concern that their benefits will not be paid in the future if and when the relevant insurer becomes insolvent. All of the suits involve the same insurer, who is described in one complaint as “a highly risky private equity-controlled insurance company with a complex and opaque structure” and a “lack of a sufficient track record”. These suits come as the Department of Labor has just issued a report about fiduciary standards that apply to selecting annuity providers for defined benefit pension plans. As summarized in the DOL’s news release, the report found that “the agency should explore developments in both the life insurance industry and in pension risk transfer” and possibly suggest changes to the Interpretive Bulletin which has been in place since 1995.
New plaintiff theory: Starting in September of 2023, one two-person California plaintiff firm filed four lawsuits against four different sponsors of defined contribution plans, alleging that it was impermissible self-dealing for companies to defray future plan contributions by using forfeited funds related to departing employees who didn’t vest in their employer match. Since then, other law firms have joined in and there have now been at least 10 such lawsuits filed. These allegations seem to contradict long-established practices, seemingly endorsed by both the Internal Revenue Service and the DOL. Just this year, the IRS proposed regulations concerning the timing for reallocating forfeiture, without raising any concerns. Nonetheless, although at least one of the suits has been dismissed, at least two of the complaints have survived a motion to dismiss.

ESG developments

DOL rule

The DOL’s proposed rule regarding environmental, social and governance (ESG) investing achieved final rule status and is still in effect, despite substantial 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 rule became effective on January 30, 2023, despite efforts to block it.
On the legislative side, Congress passed a bill on March 1, 2023 under the Congressional Review Act to block the rule, but on March 20, 2023, President Biden issued the first veto of his presidency in order to keep the new rule in effect. On 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.
On the litigation front, days before the rule was about to go into effect 25 state attorneys general and three private plaintiffs sued in federal court in Amarillo, Texas to block the rule as beyond the DOL’s authority. In March, the judge there rejected a motion to transfer venue, accusing the plaintiffs of forum shopping. However, in September 2023, the judge dismissed the suit, giving deference to the DOL interpretation but also agreeing with the DOL that the rule was fundamentally neutral (a similar suit filed in Wisconsin in February 2024 is still pending). On July 18, 2024, the 5th Circuit sent the case back to the district judge to exercise his “independent judgment,” citing the U.S. Supreme Court’s June 28 decision in Loper Bright Enterprises et al. v. Raimondo which voided the Chevron doctrine of deference to agency rulemaking.

Developments in the first ESG investment class action

American Airlines was sued in Texas federal court in June 2023 for allegedly offering imprudent and expensive ESG-oriented investments. American Airlines has stated that it did not actually include such investment options in its main menu, but the motion to dismiss was denied on February 21, 2024, with the judge finding to be sufficient the allegations that “Defendants’ public commitment to ESG initiatives motivated the disloyal decision to invest Plan assets with managers who pursue non-economic ESG objectives through select investments that underperform relative to non-ESG investments.” Thereafter, on June 20, the judge denied a motion for summary judgment, stating that “[t]he summary judgment record makes clear that a factfinder could find defendants breached their duty of prudence by failing to monitor investment managers and failing to address the facts and circumstances of ESG proxy voting and shareholder activism present within the Plan.” The bench trial began four days later, and now the parties are awaiting a decision which could potentially expand fiduciary responsibilities to include active involvement in proxy voting.

Other regulation

On September 9, 2024, the U.S. Department of Labor, the U.S. Department of the Treasury and the U.S. Department of Health and Human Services jointly released a final rule interpreting the Mental Health Parity and Addiction Equity Act of 2008 and placing further restrictions on how employer group health plans can limit coverage for mental health and substance use disorder treatments. These new Mental Health Parity rules include numerous specific scenarios and statements as to whether or not they would violate the rules, and also mandate that group health plans must perform certain extensive exercises to verify compliance and be prepared to make the results of those exercises available to the DOL within 10 days of a request.

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, increased the required minimum distribution age to 75 and allowed employers to match employee student loan repayments with retirement account contributions. 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).
However, many ERISA practitioners remained 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.
As a result of the confusion, the IRS released Notice 2024-2, the long-awaited “grab bag” notice that provides Q&A guidance on various provisions; for details see “IRS guidance on SECURE 2.0 provisions.”

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).

Contacts

Lawrence Fine

Management Liability Coverage Leader, FINEX North America

email Email phone +1 212 309 3623

John M. Orr

D&O Liability Product Leader
FINEX North America

email Email phone +1 415 955 0196

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Insurance Marketplace Realities 2025 – Fiduciary liability