Retirement plan sponsors are the first, and most important, line of defense in providing employees with well-managed retirement savings plans.
Once relatively rare, fiduciary liability litigation is on the rise across the country:
- In 2019, participants in Anthem Inc.’s 401(k) plan reached a $23.7 million settlement in an ERISA fiduciary breach lawsuit.
- In 2020, a class-action lawsuit was filed against LinkedIn for sponsors’ mismanagement of the firm’s $818 million 401(k) plan.
- Overall, class action lawsuit proposals challenging 401(k) plan fees were projected to increase fivefold from 2019 to 2020.
- As a result of increased litigation, fiduciary rates soared in 2021. Seven- and eight-figure excessive fee lawsuits become commonplace.
- In 2022, fiduciary liability rates have continued to increase, but at a somewhat slower pace, with seven-figure lawsuits continuing to be a common occurrence.
As more plan sponsors encounter legal challenges stemming from breaches in their fiduciary responsibility to act in the best interest of plan participants, insurance companies are starting to ask more questions before underwriting coverage for fiduciary risk associated with retirement plans. Some policies even go so far as to exclude coverage if an organization is involved in a class-action fiduciary lawsuit.
Four Questions Insurers Ask Before Underwriting Fiduciary Risk
Over the past few years, we’ve seen an evolution in the questions insurers are asking before underwriting coverage for fiduciary risk associated with retirement plans.
What can plan sponsors do to ensure they are diligently upholding their fiduciary responsibilities in this changing risk landscape?
First, they’ll need to present a strong case that their plan is well-administered and adheres to fiduciary best practices. To do this, plan sponsors should ask themselves the same questions insurance underwriters ask when evaluating fiduciary risk:
- Does my organization have a history of receiving any ERISA violations?
- How long has it been since my organization solicited a request for proposals (RFP) for retirement plan services?
- Are our retirement plan record-keeping fees services paid for by my organization or does the cost come out of plan assets?
- Does my organization look to outside assistance when selecting and evaluating retirement plan investment options?
Plan sponsors can make a better case for receiving more favorable coverage terms and rates if they can show, for example, that they conduct quarterly investment performance reviews, regularly request RFPs to make sure plan fees and services are aligned with market conditions, and plainly disclose plan fees.
Minimizing Fiduciary Risk for Your Organization
As a retirement plan sponsor, you have two options for meeting your fiduciary responsibilities:
- Adopting and implementing carefully designed internal controls.
- Engaging a partner to ensure that appropriate measures are followed on your behalf, thereby shifting the burden of compliance to your firm’s plan service provider selection and oversight responsibility as a plan sponsor.
Many businesses engage a retirement plan advisor with the understanding that, by doing so, they will be mitigating the risk associated with the selection and monitoring of their retirement plan investment option offerings.
Essential to the process of selecting a retirement plan advisor is determining whether the advisor will be assuming responsibility for performing functions which will result in them being recognized as a “fiduciary” with respect to these functions.
Leadership within your business should review your organization’s advisory agreements with a fine-tooth comb to determine whether their existing retirement advisor accepts liability if they protect you as a plan sponsor, and/or if they limit your rights and recourse—or those of your employees and plan beneficiaries—under ERISA.
If you determine that your advisor is not acting as a fiduciary for your plan, then it’s to question whether that advisor is serving your organization’s best interests and look around for one who will.
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