Aon | Professional Services Practice
Release Date: April 2021
Fiduciary Liability – implications of rising excessive fee litigation for professional service firms
Starting approximately in 2005, the fiduciary liability insurance market has borne the extraordinary costs of settling “excessive fee” class action lawsuits against insured corporations. Excessive fee litigation generally alleges that fiduciaries of employer-sponsored retirement plans have permitted plan service providers – like investment managers and plan administrators – to be paid excessive fees from plan assets.
The Supreme Court confirmed, in Tibble v Edison Int’l (Tibble III), 135 S.Ct. 1823, 1829 (2015), that plan fiduciaries have a continuing duty to monitor and manage plan investment options. In 2017, the United States District Court for the Central District of California concluded that plan fiduciaries failed to maintain plan investments in appropriate share classes across 17 funds and awarded judgment to the Tibble plaintiff-class, composed of Edison International employees and retirees. The failure by plan fiduciaries to properly classify assets in those funds as “institutional” rather than as “retail” resulted in the plan paying a greater ratio of its assets in fees to the service-provider See Tibble v. Edison Int’l (Tibble V), No. 07-5359, 2017 U.S. Dist. LEXIS 130806 (C.D.Cal. Aug. 16, 2017).
The Tibble “win” for the plaintiff’s bar in 2017 prompted even more excessive fee cases to be filed against corporations and other organizations, like large universities, that boast sizable assets in employment-sponsored plans. Over 85 excessive fee cases were filed in federal court in 2020 alone.
Although excessive fee claims historically targeted major corporations that boasted high employee counts and sizable plan assets, Aon recognizes an emerging trend of excessive fee claims against smaller privately held organizations.
Litigation frequency and claim severity are on the rise in the general marketplace, although we have yet to see plaintiffs’ counsel target law firms or other professional service firms for class action excessive fee litigation. That said, law firms maintaining above average plan administrator fees could be potential targets of litigation.
Recommendations to limit your Fiduciary Exposure from the leading carrier for Fiduciary Liability for Law Firms*:
1. Establish, follow, and document a robust and prudent process for retaining recordkeepers and determining their fees including:
- Periodically solicit RFPs through which several recordkeepers can submit competing bids for the plan’s business
- Benchmark recordkeeping fees using an appropriate, independent benchmark (most benefit vendors can provide)
- Negotiate fees rather than accepting quoted fees without question
- Investigate whether there is any revenue sharing being paid and consider negotiating
2. Establish, follow, and document a robust and prudent process for selecting and regularly reviewing plan investments and investment expenses, including:
- Select appropriate benchmarks for analyzing investment performance net of expense
- Follow a consistent process for replacing underperforming investments
- Investigate and consider the availability and advisability of using less expensive investment vehicles and share classes
- Maintain a diverse portfolio of plan investment options, including index funds
3. Retain qualified, independent experts to assist with fiduciary decisions – and don’t rely on benchmarks provided by service providers who are justifying their own fees or performance
4. Document the process and rationale behind fiduciary decision, being meticulous when deciding to use more expensive products or services and/or when going against expert advice.
Common excessive fee allegations
- Paying record keeper fees as a percentage of assets rather than on a fixed or flat-fee basis
- Paying record keeping fees on a fixed or flat-fee basis at a higher cost per participant than similar plans
- Paying higher fees to the plan’s recordkeeper so the employer can receive other services from the recordkeeper (e.g. payroll processing) at or below market cost
- Using revenue sharing that results in the payment of excessive fees to the plan’s recordkeeper
- Failure to remove underperforming investment funds
- Failure to offer less expensive investment funds
- Selecting actively managed funds when equivalent (and less costly) passive investment funds are available
- Selecting a low return money market fund as the plan’s “low risk” investment option vs a higher return stable value fund
Record Keeping & Investment
- Failure to leverage plan size to negotiate lower fees
- Failure to competitively bid third party services
- Failure to monitor third party fees/performance
Excessive fee claims are increasing in frequency and severity:
- To date, over 40 excessive fee cases have settled for greater than USD$10 million
- Since 2005, plaintiffs’ firms have filed more than 240 excessive fee lawsuits
- Over 85 excessive fee cases were filed in 2020 alone
Insurance market response
- Premium - Increase of 20 to 30 percent
- Capacity & Retention - Carriers are reducing total limit capacity while pushing Firm retention
- Terms - Carriers are offering renewal terms to limit excessive fee exposure
To discuss any of the topics raised in this risk alert, please contact Francis Murray.
Senior Vice President and Executive Director
This document, which has been provided as an informational resource for Aon clients, is intended to provide general guidance based upon our experience as insurance brokers and is not to be relied upon as legal advice, for which you should consult your own professionals. Aon is not authorized by insurers to make coverage determinations on their behalf. Insurance coverage depends on specific fact patterns and on the insurer’s application and interpretation of policy wording on a case-by-case basis. Coverage will be subject to the terms, conditions and exclusions in the applicable Policy.