Euclid’s whitepaper highlights the problem of excessive fee lawsuits and presents a sensible framework to restore fairness to the fiduciary standard of care for defined contribution plans.
Euclid Specialty Managers, LLC (“Euclid Specialty”) released a new whitepaper authored by the underwriting company’s Managing Principal Daniel Aronowitz exploring the problems with recent surge in excessive fee litigation. Plaintiff law firms have flooded the federal courts with cookie-cutter ERISA class action litigation against defined contribution plans and the employees who agree to serve as fiduciaries for their company’s retirement plans. The copy-cat lawsuits — now nearly 200 in number with over 90 filed in 2020 alone — attack retirement plan investment options that are commonplace and longstanding. These lawsuits allege that defined contribution plan administrative and investment fees are too high, and that any investment performance that lags any plaintiff-asserted benchmark — a moving target — is actionable negligence that should generate huge indemnity payments and high attorney fees to the firms bringing these lawsuits.
According to Euclid’s whitepaper, excessive fee litigation involves allegations that a plan is paying too much to its investment manager and recordkeeper. Specifically, the lawsuits allege that some of the plans’ investment options charged excessive fees or performed inadequately, and that the costs to administer the plan are too high. As Aronowitz explains, “Plaintiff firms are targeting defined contribution plans with a new purported standard of care that has not been officially endorsed by regulators. The lawsuits find a lower-cost mutual fund and assert that all investment fees higher than that purported benchmark constitute fiduciary negligence. Alternatively, the plaintiffs allege that a lower recordkeeper fee is available in the market, and that any higher amount that the plan charges participants is also part of a damages model from which the plaintiffs lawyers take a one-third cut. The bar to file a lawsuit with huge purported damage models is too low, and subjects all plan sponsors to the harassment of unfair and expensive litigation. The Department of Labor must step in to set a fair and uniform standard, and, in the meantime, federal courts must apply a more rigorous standard to weed out the frivolous litigation.”
The Supreme Court of the United States has issued several surprising decisions at the end of the 2020 Spring Term. The closely watched June 1 decision in Thole v. U.S. Bank[i] is no exception. In a 5-4 split ruling, the Court held that defined benefit pension plan participants lacked standing to challenge alleged plan misconduct if that alleged misconduct did not jeopardize their ability to receive benefits. The Dissenting Opinion called the decision “remarkable,” given that this high standing bar prevents pension plan participants from suing for alleged mismanagement of their pension until the plan is “on the verge of default.” The Thole decision may have a real impact in slowing down the recent epidemic of class action cases that are now routinely filed against employee benefit plans.
After a decade-long bull market, the financial markets declined severely in March 2020 based on the financial effects of the coronavirus pandemic. And while the market has recovered some of those losses, it appears that we are in for an extended period of market turmoil as the economy staggers under the government-enforced shutdown to combat the virus. The question we have been asked the most since the beginning of the crisis is whether employee benefit plans and their fiduciaries will be sued for investment losses, and how will fiduciary liability insurance policies respond. We cannot predict the future, but we can draw on our experience from prior recessions and declining markets to provide some context and guidance. Our prior post focused on potential coronavirus-related claims against health plans. This article focuses on retirement plans.
The Current Legal Landscape
When the famous criminal Willie Sutton was once asked why he robbed banks, he responded “because that’s where the money is.” For the last ten years, class action plaintiff law firms have been suing defined contribution plans for purported excessive fees. These plaintiff firms are attracted by the large asset base of many defined contribution plans, which allows them to allege substantial damage models based on allegations that higher investment and record-keeping fees deprived participants of better returns in 401(k), 403(b) and other defined contribution plans. Plaintiffs have filed dozens of cookie-cutter cases alleging the same core allegations that some of the plans’ record-keepers charged excessive fees or the investment options performed inadequately:
- That the plan fiduciaries failed to monitor the performance of actively managed plans that under performed the results of index funds;
- That the fees for individual plan investment choices were higher than Vanguard or other institutional share class index fund fees; and/or
- That the record-keeping fees charged to plan participants were excessive.
On March 18, 2020, the President signed the Families First Coronavirus Response Act (“Families First Act”), and signed the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) on March 27, 2020. The Families First Act requires group health plans, health insurers and government programs to provide free coronavirus testing, and the CARES Act clarifies some of the health care plan provisions. Like any new legislation, coverage issues and questions will arise, and will likely lead to participant benefit and provider reimbursement disputes. This article addresses how your fiduciary liability insurance coverage, particularly for health and welfare benefit plans, would respond to this new legislation. (more…)
As a leading underwriter for fiduciary liability insurance, we are often asked about the difference between a Fiduciary Liability Insurance policy and an Employee Benefits Liability (EBL) insurance policy. Namely, some plan sponsors believe that they do not need to spend additional premium dollars to purchase fiduciary liability insurance when they have EBL coverage as part of their commercial package general liability insurance policy. As discussed more fully below, including an analysis of a recent court case, a fiduciary liability insurance policy provides significantly broader coverage than the limited administration coverage in a standard EBL policy to protect employee benefit plans and its fiduciaries. Even the defense of routine benefit claims can be excluded from coverage under an EBL policy, which is why plan sponsors need to protect their plans and plan fiduciaries with quality fiduciary liability insurance coverage.
EBL Insurance Coverage
The standard Employee Benefits Liability Insuring Agreement[i] provides that the Insurer “will pay those sums the insured becomes legally obligated to pay as damages because of acts, errors, or omissions arising out of the ‘administration’ of your ‘employee benefit program.’ “Administration” is defined to mean: “(a) Counseling employees, including their dependents and beneficiaries with respect to the ‘employee benefit program’; (b) Handling records in connection with the ‘employee benefit program’; (c) Effecting or terminating any employee’s participation in a plan included in the ‘employee’s participation in a plan included in the ‘employee benefit program,’; or (d) interpreting the ‘employee benefit program.’ Administration does not mean the selection process of your ‘employee benefit program.’” “Employee Benefit Program” is defined to “include only the following: (a) group life, disability or dental, group accident or health insurance; unemployment insurance, social security benefits, workers’ compensation and disability benefits; (b) unemployment insurance, social security benefits, workers’ compensation and disability benefits; (c) The following plans but only if they are self-directed by the employee: (1) IRS qualified pensions; (2) 401K plans; (3) profit sharing plans only those plans that are IRS qualified and equally available to all full-time employees; and (4) stock subscription plans but only those plans that are IRS qualified and equally available to all full-time employees.”
The Insurance Services Office (ISO) EBL policy contains exclusions that limit the available coverage:
This insurance does not apply to:
(a) Dishonest, Fraudulent, Criminal or Malicious Act. Damages arising directly or indirectly out of any intentional, dishonest, fraudulent, criminal or malicious act, error or omission, committed by any insured, including the willful or reckless violation of any statute . . .
(d) Insufficiency of Funds. Damages arising directly or indirectly out of failure of performance of contract by an insured.
(e) Inadequacy of Performance of Investment/Advice Given With Respect to Participation. Any “claim” arising directly or indirectly out of: (1) the failure of any investment to perform; (2) errors in providing information on past performance of investment vehicles; or (3) advice given to any person with respect to that person’s decision to participate or not to participate in any plan included in the “employee benefit program.”
(g) ERISA. Damages for which any insured is liable because of liability imposed on a fiduciary by the Employee Retirement Income Security Act of 1974, as now or hereafter amended, or by any similar federal, state or local laws.
(h) Available Benefits. Any “claim” for benefits to the extent that such benefits are available, with reasonable effort and cooperation of the insured, for the applicable funds accrued or other collectible insurance.
(i) Taxes, Fines or Penalties. Taxes, fines or penalties, including those imposed under the Internal Revenue Code or any similar state or local law.
Although many companies modify the ISO language, the core EBL coverage is usually very similar. EBL provides coverage for “administration” of a company’s employee benefit plans. Administration is broadly defined to cover advice to participants, including interpretations of the plan as to whether something is covered, enrollment of employees in a plan, and handling plan records. The limitations of EBL coverage, however, are found in its multiple broad exclusions. For example, EBL coverage excludes any breach of fiduciary duty claim under ERISA or any fiduciary law. This excludes most claims against employee benefit fiduciaries, as even the most generic denial of benefit claims are usually styled as breaches of fiduciary duties against the plan administrator and its fiduciaries or trustees. The ISO form goes further to exclude any claim for “available benefits,” which excludes both defense and indemnity under the policy. While this benefits exclusion is not contained in every insurer’s EBL coverage, the ERISA exclusion is universal. Finally, the EBL policy excludes claims for funding of the plans, claims of dishonesty or malfeasance, and regulatory penalties are also excluded – all crucial liability risks faced by modern employee benefit plans.