According to the report, several categories of 401(k) fees exist, including plan administration fees, recordkeeping fees, investment management fees, financial advice fees, and fees for consulting and other services. These fees can be paid in several ways, from dollar per participant or dollar per plan models, to asset-based fees and participant activity fees.

ERISA fiduciary rules require that plan investment management and recordkeeping fees be reasonable and that plan investments perform at a reasonable level, but plaintiff firms are suing plans for conduct that used to be routine.

Common and long-standing methods of DC management such as asset-based fees and revenue-sharing agreements are being attacked as breaches of fiduciary duty, said Euclid.

Excessive fee claims

The core themes of excessive fee claims are that the plan sponsor failed to manage the administrative expenses of the plan by ensuring the lowest possible recordkeeping costs; failed to ensure the lowest possible cost of investment management; or breached fiduciary duties by offering underperforming or ill-suited investment options to plan participants.

For example, an excessive-fee lawsuit filed against Anthem claimed the company selected overly expensive share classes, overpaid its recordkeeper, and offered a money market fund rather than a stable value fund. Anthem settled the lawsuit for $23.65 million.

The Anthem case and others follow a cookie-cutter template, said Euclid. Motions to dismiss are almost always filed, but only about one-third of those motions are granted. Up to 15 percent of cases make it to a decision on summary judgement. Only one-quarter have resulted in a victory for the defense. Six cases have gone to trial with four resulting in complete defense victories, one resulting in complete plaintiff victory, and one was reversed and then settled.

Like Anthem, most cases ended up being settled when insurance companies are forced to pay to avoid bad faith failure to settle within policy limits, said Euclid.

The litigation continues to evolve and push new fiduciary standards, such as arguing that any recordkeeping fee above $50 per participant is imprudent, depending on the plan size. Significantly, Euclid noted that the litigation is now targeting plans of all sizes, not just large plans. Plans with assets as low as $4.5 million have been sued.

Impact on fiduciary liability insurance

Excessive-fee litigation is also impacting the availability of fiduciary liability insurance. Euclid said the market is at an inflection point, as fiduciary insurers are limiting their exposure by reducing limits, raising premiums, limiting excessive fee retentions, and capping or sublimiting the amount of excessive fees or class action exposure. A key change in the fiduciary market is the increased level of policyholder retentions, with many large plans now facing retention of up to $5 million, said Euclid.

"Change is needed to ensure a functioning fiduciary insurance market to protect fiduciaries exposed to individual liability," said report author Daniel Aronowitz, managing principal and owner of Euclid Specialty. "Indeed, it is important to remember that many trustees serve as volunteers with no additional compensation. A viable fiduciary liability insurance market is essential to protect against individual liability for ERISA fiduciaries."

Broad systemic change needed: Euclid

To manage fees and attempt to avoid litigation, many plan sponsors have focused on documenting their decision-making processes and engaging in frequent requests for fee proposals from new vendors to drive down plan expenses. Euclid said broad systemic change including intervention from regulators is needed on top of these well-intentioned actions.

Among the reforms it calls for are a uniform and rational standard of care from federal regulators; uniform application of standards in federal court for ruling on motions to dismiss in excessive fee cases; a damage cap and limited attorney fees to reduce outsized damages; and shouldering of the responsibility for overcharges to be shared by recordkeepers.

Euclid also provided advice for plan sponsors to de-risk plans for excessive-fee claims, including hiring an experienced consultant to review plan fees and investment performance annually; hiring a plan expert to reduce plan recordkeeping and investment fees; and considering new Pooled Employer Plan (PEP) options to reduce fees by joining with other companies.

Kristen Beckman is a freelance writer based in Colorado. She previously was a writer and editor for ALM's Retirement Advisor magazine and LifeHealthPro online channel. She also was a reporter for Business Insurance magazine covering workers compensation topics. Kristen graduated from the University of Missouri with a degree in journalism.

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