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Since approximately 2005, fiduciary liability litigation has been on the rise across the country. On average over the last 5 years, 72 cases per year have been filed.
- Below are a few real-world, historical examples of the impetus for litigation for breach of fiduciary duty:
- Revenue sharing
- Conflicts of interest
- Excessive fees (526 cases filed from 2016 through 2024)
- Fiduciary liability litigation is expensive to defend and costly to settle. Depending on plan size, many cases have settled for $10 million or higher.
- Even retirement plans with less than $5 million in assets have been targeted by excessive fee litigation.
- Additional avenues through which litigation can arise and create angst for plan sponsors include topics such as diversification of underperforming investments, ESG, use of forfeiture accounts, and cybertheft.
As plan sponsors continue to encounter legal challenges stemming from accusations of alleged breaches in their fiduciary responsibility to act in the best interest of plan participants, insurance rates continue to fluctuate and 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.
Uncertainty Surrounding the Department of Labor’s 2024 Fiduciary Rule
Since 1975, with the enactment of the Employee Retirement Income Security Act of 1974 (ERISA), the Department of Labor (DOL)’s definition of fiduciary advice has been in place. While modifications have been attempted over the years, those modifications have either been abandoned or vacated following adoption. In 2024, the DOL took steps anew to motivate financial service providers to prioritize the best interests of their plan participants by introducing a fiduciary rule broadening the definition of who is considered an “investment advice fiduciary” under ERISA and eliminating certain prohibited transaction exemptions.
These changes were challenged in the industry, in part, due to conflicts with existing law. Consequently, the Courts granted a legal pause of the rule change. Until further action is taken by the DOL, the existing 1975 rules remain in effect as do the original text of prohibited transaction exemptions.
The DOL recognizes just how hard Americans work to earn their retirement and is always searching for ways to ensure those planning and preparing for retirement are protected. By increasing the fiduciary responsibility of retirement plans, the DOL had hoped to boost the trust between sponsors, advisors, and plan participants. While the language of the new rule seemingly did not accomplish that, this matter remains unresolved.
Depending on the ultimate outcome, insurance companies are keen on increasing their requirements before underwriting coverage for these plans.
Four Questions Insurers Ask Before Underwriting Fiduciary Risk
As the fiduciary risk landscape evolves, we have seen a different evolution right alongside it in the questions insurers are asking before underwriting coverage for fiduciary risk associated with retirement plans.
How can plan sponsors ensure they are diligently upholding their fiduciary responsibilities in this changing risk landscape?
First and foremost, 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 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 that they are taking the necessary steps to ensure the best interests of their plan participants. For example, they could prove this impetus by showcasing how they conduct quarterly investment performance reviews, regularly request RFPs to make sure plan fees and services are aligned with market conditions, or 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.
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 might be time to question whether that advisor is serving your organization’s best interests and to look around for one who will.
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