Flawed And Reckless Provider Selection?



Although courts have dismissed some of the excessive fee allegations against retirement plan fiduciaries, claims show no sign of stopping. In fact, ERISA experts point out that lawyers for plaintiffs, having learned from the dismissals, are digging deeper.


Failure To Bid Out the Plan

Diligence in choosing and monitoring service providers is essential for plan sponsors,  With this obligation comes the task of periodically benchmarking the services–and  carefully documenting having done so. A recently filed lawsuit underscores the risks associated with “due care”in executing these responsibilities under the high standards of ERISA. Reporting on the allegations, the  National Association of Retirement Plan Advisors (NAPA) concludes: “All in all, the suit goes deeper than many do in highlighting potential issues with fees and fund selection, and takes pains to acknowledge not only service levels, but to assert that there was nothing exceptional provided in terms of services for those fees. However, it also acknowledges that without access to a service agreement, it’s not precisely certain on that point.” Alleged fiduciary breach allegations include:


  • Defendants….failed to take any or adequate action to monitor, evaluate or reduce their service provider fees….


  • Defendants have a flawed and reckless provider selection process that is tainted by failure of effort, competence, or loyalty….


  • Defendants failed to bid the Plan out to other service providers….


Allegations of a fiduciary breach are not of course an automatic indication of mistakes made by the plan sponsor and other fiduciaries. However, mounting a defense is disruptive and costly. Plan sponsors are advised not to take chances: in the face of litigation, securing ERISA defense costs $600—per hour. Proactive protection is essential and Colonial Surety is here to help with affordable Fiduciary Liability Insurance. With this, 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 against regulatory actions related to data and privacy, as well as expert response services.


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Erosive Effect: Excessive Fees

Like the swell of previous cases, the latest fiduciary breach lawsuit, filed in mid-June in California, claims  “defendants breached their fiduciary duties of prudence and loyalty to the Plan,” and asserts:“The erosive effect of   excessive fees and the resulting lost returns compounds over time substantially lowering the corpus of participants’ retirement investments. In selecting share classes with higher fees, Defendants demonstrated a lack of basic skill and prudence when selecting investments.” While claims of excessive fees are nothing new, NAPA, points out this case is noteworthy in that it goes deeper, specifically asserting that there is no evidence that the services provided actually warranted the fees:


The suit claims that “the package of recordkeeping services the Plan received included standard recordkeeping services such as government reporting services, plan sponsor support services, recordkeeping services, and plan investment services and reporting,” but more importantly that “the Plan did not receive any unique services or at a level of quality that would warrant fees far greater than the competitive fees that would be offered by other providers….”


Summing up the case, NAPA illustrates how the plaintiffs have built the case based on both the precedence of previous court decisions and the protocols of the Department of Labor:


This particular suit spent some time outlining not only the duties and importance of the recordkeeping function but noted that “courts that have considered the issue have made it clear that ‘the failure to exercise due care in selecting . . . a fund’s service providers constitute a breach of a trustee’s fiduciary duty’”—and that (citing 28 U.S.C. § 1108(b)(2)) “services must be necessary for the plan’s operation.”  The suit continues by referencing Labor Department guidance on the importance of prudent selection, the need for an objective process of selection, and that that process must be “designed to elicit information necessary to assess . . . the reasonableness of the fees charged in light of the services provided.” The suit also states, as has other, similar litigation, that “the cost of recordkeeping and administrative services depends on the number of participants, not the amount of assets in the participant’s account.”


Experts remind us that as fiduciaries, we can be held personally liable for damages, even decades into the future.” However, plan sponsors do not have to carry their fiduciary risks alone. As national expert Richard Clarke advises: “Retirement plan sponsors have enough on their plates dealing with the elements under their control, so they should pursue remedies, like fiduciary liability insurance, that relieve the exceptional burden of things they cannot control.”  


Remember: Colonial Surety ensures that for a few dollars a day, plan sponsors can be covered in the event of claims of alleged or actual breaches of duty in connection with the employee retirement plan. Colonial’s fiduciary liability insurance includes defense costs and penalty limits up to $1,000,000. Uniquely, Colonial even includes Cyber Liability Insurance, locks in multi-year rates and offers installation payments. Why carry all the risks alone? Protect yourself and your business now:


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