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.