A Win for Plan Sponsors?



It’s been two decades since a torrent of lawsuits began alleging that fiduciary failures were resulting in high fees for participants, and attorneys say the copycat claims are unlikely to stop anytime soon. There is, however, a modicum of “good news” for plan sponsors: recently, the U.S. 10th Circuit Court of Appeals became the latest circuit court to place the burden of “meaningfully benchmarking” fees on plaintiffs.


Understanding the Allegations

Though most plan sponsors engage service providers for company sponsored retirement plans, they retain fiduciary responsibilities under the high standards of ERISA law. As a result, they can be sued, and in fact have been successfully sued scores of times over the past two decades. At Plan Sponsor, Joanne Roskey sums up the trend, noting:


In the last two decades, hundreds of class action lawsuits have been filed against fiduciaries of ERISA retirement plans alleging their imprudence and lack of oversight of plan finances caused their plans to pay too much for investments and plan administration. Those lawsuits, netting hundreds of millions of dollars for participants and their attorneys, typically include claims that plan fiduciaries imprudently selected and retained investment options with high fees when lower-priced options were available and paid too much for recordkeeping and investment management services.


The legal and regulatory framework that plaintiffs have built their cases against plan fiduciaries on stems directly from the high standards of the Employee Retirement Income Security Act of 1974. Specifically, as experts explain:


ERISA Section 404(a)(1) imposes on plan fiduciaries a duty to act prudently and solely in the interests of participants and beneficiaries when managing and administering employee benefit plans and the assets of those plans. To comply, ERISA fiduciaries must pay only reasonable plan expenses. In addition, under ERISA Section 406(a)(1)(C), a fiduciary engaging a service provider to give services to a plan will cause an ERISA-prohibited transaction if the plan’s contract or arrangement with the service provider does not meet the “reasonable compensation” criteria set forth in the prohibited transaction exemption in ERISA Section 408(b)(2). Fiduciaries can be held liable for losses to plans caused by their fiduciary breaches and prohibited transactions, and service providers can be ordered to return to plans the fees they received in violation of ERISA. Fiduciaries and service providers are also subject to civil penalties under ERISA Section 502(i) and (l).


Heightened Standards

Two decades into the courtroom battles over excessive fees and underperformance of funds, allegations are now supposed to be subject to “heightened standards,” though the reality is that most plan sponsors continue to be on the losing side of motions to dismiss. In the recent case heard by the U.S. 10th Circuit Court of Appeals, plaintiffs,  as has become typical, claimed that retirement plan fiduciaries had breached their “duty of prudence by offering to plan participants high-cost funds and charging high fees.” However, the finding by the U.S. 10th Circuit Court of Appeals that, “the plaintiffs did not satisfy the standard to overcome the defendants’ motions to dismiss” is noteworthy:


Our colleagues in the Third, Sixth, Seventh, and Eighth circuits confirm, there is no doubt a claim for breach of ERISA’s duty of prudence can be based on allegations that the fees associated with the defined-contribution plan are too high compared to available, cheaper options,” the judges wrote. “But to raise an inference of imprudence through price disparity, a plaintiff has the burden to allege a ‘meaningful benchmark.’ We thus adopt the approach to an ERISA plaintiff’s pleading burden articulated by the Eighth Circuit….


Defense Remains Essential

Despite the 10th Circuit’s decision, ERISA law experts do not foresee fiduciary breach litigation slowing down anytime soon. Reporting for Plan Sponsor, Noah Zuss shares this attorney observation:


The ruling is unlikely to slow the pace of retirement plan fiduciary breach litigation

brought by plaintiffs under the Employee Retirement Income Security Act….I don’t know that any one particular case is going to stop the plaintiffs’ bar in their tracks, [because] they’ve been going at this for well over a decade in this space….They’ve survived a lot of motions to dismiss, and they have been defeated on a lot of motions to dismiss. I am hopeful that other courts will adhere to or take guidance from what the 10th Circuit has said here. But whether this slows the plaintiffs’ bar down or not? I do not think so.


Preparation for defense remains a must for plan sponsors. Allegations are not an automatic indication of wrongdoing, but as plan sponsors and other fiduciaries named in lawsuits quickly learn, mounting a defense is expensive and burdensome, becoming only more so as cases slog along for years. Experts agree that proactive protection is the wisest move for plan sponsors, and Colonial Surety is here to help with affordable Fiduciary Liability Insurance. Armed with this coverage, for a few dollars a day, you’ll have coverage for defense costs and penalty limits up to $1,000,000 if faced with alleged or actual breaches of duty in connection with the employee retirement plan. Cyber Liability coverage is included at no extra cost, providing additional protection–for the plan and your companyagainst regulatory actions related to data and privacy, as well as expert response services.


Get On The Defense: Fiduciary+Cyber Insurance Here


Colonial Surety Company is rated “A Excellent” by A.M. Best Company, U.S. Treasury listed and in business all across the country. Serving customers since 1930, we are the trusted source for the pension industry to secure legally required ERISA bonds, fiduciary liability insurance and cyber-liability insurance. We help safeguard plan sponsors, pension professionals and financial advisors — and keep their businesses compliant — with pain-free, efficient, and friendly service every time.