January 2024

The frequency and severity of excessive fee litigation remained the top concern among fiduciary liability insurers in 2023.

Excessive fee cases generally focus on fees that 401(k) and 403(b) plan participants pay for investment management or administration. They typically allege that plan fiduciaries breached their fiduciary duties under the Employee Retirement Income Security Act of 1974 (ERISA) by overpaying for third-party plan administration or investment services. Plaintiffs often contend that fees are excessive relative to performance.

Since 2020 plaintiffs’ firms have filed at least 270 excessive fee lawsuits, targeting plans of all sizes. Almost 40% of claims have been filed against plan sponsors with applicable assets below the $1 billion “jumbo plan” threshold. Filings in 2023 (35) appear to be down versus 2020-22, but defense counsel and industry experts have opined that this drop likely represents a temporary lull rather than a trend. Many of the plaintiffs’ firms that were prodigious filers of excessive fee cases in 2020 through 2022 are now occupied with litigating those cases.¹

Excessive fee litigation is expensive to defend and costly to settle. It is estimated that defendants only have about a 20-25% chance of winning motions to dismiss and will likely settle if they are unsuccessful.² Over 130 cases have resulted in settlements of $1 million or higher, including more than 55 that have settled for $10 million or higher.

As a result, the fiduciary liability marketplace saw significant firming in 2021 and 2022 including increased pricing, higher retentions, and reduced capacity. Yet, by mid-2023 the overall market had stabilized overall stabilization.

Capacity

Insurers continued to manage capacity offered on any one program and rarely offered primary limits of liability greater than $10 million with several insurers offering a maximum of $5 million on any layer. 

Retentions

Virtually all insurers now mandate much higher retentions of $1 million even $15 million (depending upon the insurer) for excessive fee claims or all forms of mass/class action claims, particularly for Insureds with defined contribution plan assets greater than $500 million.

Pricing

Pricing stabilized by mid-2023 with most Insureds experiencing low single digit increases/decreases in premium because of:

(a) rate increases previously imposed over 2021 and 2022

(b) higher excessive fee or mass/class retentions

(c) increased competition from several new market entrants for primary and low excess layers

2024 is likely to remain stable in terms of capacity, retentions and pricing for public companies that have not had a material change in risk and that any excessive fee or mass/class retentions are not subject to continued “stair stepping” increases. Coverage terms and conditions should remain stable as well, with modest enhancements and clarifications.

Exposures to Watch in 2024

There are several caveats to this generally positive picture. First, over 150 excessive fee cases remain active and additional significant settlements could adversely impact future pricing, particularly if they involve fiduciary liability insurers with smaller books.

Second, the markets are keeping a watchful eye on several developing potential exposures, including the following:

• Mortality Table Litigation – Defined Benefit Pension Plans: At least 30 class actions have been filed over the last few years challenging allegedly outdated actuarial and interest rate assumptions employers use to calculate certain optional defined benefit pension formats (e.g., joint and survivor benefits), thus failing to account for changes in life expectancy. Notably, one such case settled for $60 million. Recently, a plaintiffs’ firm initiated a mortality table litigation trolling campaign targeting over 50 entities from various industry sectors.
  
  
• Plan Forfeiture Litigation – Defined Contribution Pension Plans: In a potential new wave of class action litigation that commenced in the second half of 2023, at least 5 class actions have been filed against sponsors of defined contribution plans related to the manner in which those sponsors used money received from “plan forfeitures” – that is, account balances forfeited by workers who left the company before they were vested in those sums. Plaintiffs allege that the sponsors breached their fiduciary duties under ERISA by using such proceeds to pay their own contribution obligations to the plan rather than to defray plan expenses on behalf of plan participants.
  
  
• Potential Health Plan Litigation: ERISA defense counsel has expressed concern over potential claims which may arise from the sponsorship of employee health plans due to amendments to ERISA made by the Consolidated Appropriations Act of 2021 (CCA 2021). Among other provisions, CCA 2021 amended ERISA Section 408(b)(2) to require consultants and brokers to healthcare plans receiving $1,000 or more to provide detailed fee disclosures to the “responsible plan fiduciary”. Further, the fees of plan consultants and brokers ultimately extends to other services for which they contract such as recordkeeping and administrative services, TPA services (processing benefit claims), and PBM services (processing pharmacy claims).³ As a result, plan sponsors and their fiduciaries are required to monitor the “reasonableness” of these fees – i.e., in a similar way that sponsors or retirement plans and their fiduciaries must monitor third-party service provider fees. Fiduciary liability insurers are concerned that this amendment may lead to a new chapter of Excessive Fee litigation because: (a) the Department of Labor is likely keeping watch for such potential claims; and (b) a major plaintiffs’ firm is already trolling for potential plaintiffs in “Excessive Healthcare Plan Fee” claims against four large employers.⁴
  
  

Notably, the continued evolution of the pooled employer plan (PEP) may impact the fiduciary liability market in 2024 and beyond. Enabled through recent US legislation, PEPs are more efficient 401(k) structures that allow unrelated employers to pool 401(k) assets in a single plan to gain economies of scale while transferring fiduciary and operational responsibilities to the PEP provider. The expectation is that PEPs will achieve size and scale, leading to more cost-effective, best-in-class investments and lower-cost administration.⁵

If you have questions about your coverage or are interested in obtaining coverage, please contact your Aon Broker.

Contact

Discuss this article with Financial Services Group professional Jay Desjardins.



Jay Desjardins
Managing Director, Deputy National Practice Leader
Radnor

1 - Aon’s research was based largely on blooberglaw.com and plansponsor.com
2 - See https://www.investmentnews.com/fiduciary-insurance-costs-401k-litigation-198407; Bloomberg Law, “Flood of 401(k) Fee Lawsuits Spur Wave of Early Plaintiff Wins” (Jacklyn Wille, 4/5/22)
3 - Per “Fee Frenzy: Navigating the Expanding World of Excessive Fee Claims” (a webinar co-presented by Morgan, Lewis & Bockius and Chubb Insurance, 11/7/23)
4 - Per https://www.napa-net.org/news-info/daily-news/schlichter-exclusive-does-new-wave-fiduciary-litigation-loom
5 - The SECURE Act requires that the PEP be administered by a pooled plan provider (PPP), who serves as the PEP sponsor and its primary plan fiduciary. The PPP selects the PEP's service providers including the recordkeeper, investment advisor, and auditor, removing those time-intensive decisions and processes from employers and shifting the fiduciary responsibility of those providers to the PPP. The PPP allows participating employers to outsource the functions of administering a retirement program to an unrelated third party. The Aon Retirement and Investment Practice sponsors a PEP for its clients that choose to join. As of November 2023, more than 70 employers are live or in implementation in the Aon PEP, representing 49,500 covered employees and more than $2 billion in assets. Read more about the Aon PEP here.

This document is not intended to address any specific situation or to provide legal, regulatory, financial, or other advice. While care has been taken in the production of this document, Aon does not warrant, represent or guarantee the accuracy, adequacy, completeness or fitness for any purpose of the document or any part of it and can accept no liability for any loss incurred in any way by any person who may rely on it. Any recipient shall be responsible for the use to which it puts this document. This document has been compiled using information available to us up to its date of publication and is subject to any qualifications made in the document.