Investment Imprudence: Claims on The Rise



No retirement plan sponsor sets out to be accused of imprudent decision-making related to the investment options offered to participants, but claims are on the rise. That doesn’t mean claims over administrative fees have subsided—it’s just that the doors of ERISA litigation have been thrown open wider.

Underperforming Funds?

Though nothing new, defense against allegations of excessive fees continues to be an unfortunate reality for many plan sponsors. Regular benchmarking is a must. Meanwhile, a report on ERISA lawsuits from 2023 reveals troubling new trends related to claims of “deficient investment performance” and “investment imprudence”: “An analysis of the 2023 lawsuits reveals that plaintiff law firms continue to pursue bread and butter excess recordkeeping fee claims, but the number of investment underperformance lawsuits continues to rise.” Of particular concern to plan sponsors, according to the recent report, is that investment imprudence cases are occurring “in which plaintiff firms allege fiduciary imprudence even when the purported underperformance is less than one or two percent compared to the highest returning fund they can find….”

On the litigation front, increased focus on investment performance is not resulting in a decline of interest in claims related to the fees associated with retirement plans. In fact, 2023 brought in record-high settlements for plan participants, costing businesses a total of $353 million over allegations related to fees. Plan sponsors will want to bear in mind that being a small company with a relatively small plan is not a “free pass” when it comes to ERISA allegations: the average settlement in 2023 was $8.4 million, with some settlements in the $200,000 range. The harsh reality for plan sponsors is that even when nothing has been done wrong, settlement frequently turns out to be less painful than the cost and disruption of mounting and sustaining defense. 

Navigating The Markets In 2024

Though “resilience” and “optimism” remain in the conversation, there is plenty to keep investors–and retirement plan sponsors–up at night. According to a recent Natixis survey, which included perspectives from 500 investors who collectively manage $23.3 trillion in retirement and other institutional assets, threats for 2024 include: “the continued potential for a recession, turmoil in international markets and market volatility driven by a contentious election year at home.”  Although worries about how the near future will impact retirement investments reflect concerns about politics and ambitions around the globe, the biggest investment portfolio risk, according to the intel gathered by Natixis, is interest rates. Nonetheless, even with the continued volatility, few finance experts “are lowering their assumed rate of return for 2024,”  and predict long-term returns will “remain solidly at 8% on average.”

Given their fiduciary obligation to administer retirement plans for the benefit of participants, plan sponsors always have plenty to worry about. As if ERISA litigation over investment options and fees is not enough, there are also scary repercussions associated with how limiting investment options can negatively impact retirement funds over time. Unfortunately, being “darned if you do, and darned if you don’t” is part of life as a plan sponsor. 

Stop shouldering all the risks alone: armed with Colonial’s liability coverage, if you face claims of alleged or actual breaches of duty in connection with the employee retirement plan, you’ll be protected with defense costs and penalty limits up to $1,000,000. At Colonial, a whole year of Fiduciary Liability coverage is less than a few dollars a day, and we even include Cyber Liability coverage to further protect you, your business and the retirement plan.

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Serving customers since 1930, Colonial Surety is 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. Colonial Surety Company is rated “A Excellent” by A.M. Best Company, US Treasury listed and in business all across the country.