As every retirement plan sponsor knows, careful stewardship of the savings of participants is not just the right thing to do: it is a fiduciary duty governed by ERISA. With more and more lawsuits on behalf of participants alleging fiduciary breaches, defense attorneys remind sponsors: take precautions.
Allegations of Violations
Although retirement plan sponsors rarely set out to do the wrong thing, errors and oversights are quite possible, especially given the complexities of ERISA–and the modern world. Cybersecurity is certainly adding to the challenges, as are shifting expectations and emerging regulations. Now that numerous cases have been won or settled in favor of plaintiffs, precedent allows more claims to come forward. The harsh reality for plan sponsors is that even the mere allegation of an ERISA violation becomes disruptive and costly quickly, and cases can drag on for years, with ERISA defense attorneys averaging about $600–per hour. As 401k Specialist puts it:
ERISA—the federal law that sets minimum standards for most voluntarily established retirement and health plans in private industry to provide protection for individuals in these plans—is big business. There are plenty of law firms focused on bringing lawsuits on behalf of “wronged” participants for issues like charging excessive fees or any number of other issues stemming from a participant believing their plan sponsor has violated their rights under ERISA.These lawsuits can be costly and time-consuming, and employers must be prepared to defend themselves against any allegations of wrongdoing….
Over the past 10-15 years, hundreds of lawsuits have been filed against… plan fiduciaries. The lawsuits have typically alleged that fiduciaries acted imprudently in selecting and monitoring funds based on underperformance, but the more common allegation was that the funds’ fees were just too high, says Groom’s Scott Mayland, who’s practice focuses on the fiduciary responsibility and prohibited transaction sections of ERISA.
Neither diligent effort, nor the ERISA fidelity bonds required by the Department of Labor (DOL), provide defense in the face of lawsuits or investigations. Experts agree that proactive protection is now 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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Underperformance?
Central to many of the ERISA lawsuits winding their way through courtrooms is the claim of underperforming funds. As Scott Maryland of Groom Law Group points out, it is possible for plan fiduciaries to defeat these allegations, but strong, proactive defense is a must: “Plan fiduciaries may be able to protect themselves by considering what an appropriate benchmark for their target date fund might be, based on the investment strategies and objectives of their selected funds, as well as the needs or goals of the plan. The performance of the selected fund can then be compared to the benchmark as part of the fiduciaries’ ongoing monitoring process.” Maryland further observes:
The more recent spate of lawsuits filed in 2022 was interesting because they challenged the selection of passively managed target date funds with some of the lowest fees on the market, and the allegation was that the funds underperformed because their asset allocation was too conservative….At this point, some of these lawsuits have been dismissed, but most of them are still pending and there could be still be a lengthy appeals process….Courts generally require that plaintiffs point to a meaningful benchmark to establish that target date funds underperformed. When fiduciaries win these cases, it is often because the court concludes that the plaintiffs cherry-picked a fund that happened to perform better during the time period rather than a meaningful benchmark that compares reasonably well to the funds the fiduciaries selected (or, to take another fruit-related metaphor, that the plaintiffs were comparing apples and oranges).”
Protect yourself: Colonial Surety ensures that plan sponsors have affordable coverage 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. Cover yourself, today:
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Pension plan professional?
Colonial ensures your plan sponsor clients have the complete coverage they need—and we’ve got you too. From Errors and Omissions Insurance to Fiduciary Liability Insurance, Employment Practices Liability Insurance–and more, we’re HERE with the coverages pension professionals need to keep their businesses going—and growing.
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.