Helping to protect clients against excessive fee claim lawsuits

How can you build a defensible position against the surge in excessive fee litigation?

Helping to protect clients against excessive fee claim lawsuits

Professional Risks

By Desmond Devoy

This article was produced in partnership with The Hartford.

Client expertise blurb: Desmond Devoy, of Insurance Business America, sat down with Jason Wallace, head of private company management liability for financial lines at The Hartford, to discuss the rise in excessive fee litigation, and how clients can best marshal a defence against these suits.

Billion-dollar retirement plans are no longer the singular target of excess fee lawsuits, with fewer sectors now immune – but there are still steps companies can take to mitigate risk.

What are excessive fee claims?

Excessive fee claims are class action litigation brought against the fiduciaries of employee-sponsored retirement plans, like a 401k. These claims tend to contain allegations that the fiduciaries breached their duties under the Employee Retirement Income Security Act of 1974 (“ERISA”) with the focus on reasonable fee structures.

A breach of fiduciary duty can include anything from allowing excessive fees by service providers, to the failure to monitor an investment’s performance over time, or even the failure to offer the lowest cost share classes and prudent investment options.

“Excessive fee litigation is challenging the industry,” said Jason Wallace, head of private company management liability for financial lines at The Hartford, during a recent interview.

The issue has grown from impacting companies with retirement plans exceeding $1 billion in plan assets, especially in the education sector, to affecting much smaller plans regardless of sector.

“These damages can be costly, because damages claimed are not only going to include just the alleged value of the excessive fees but they also could include the alleged value of unrealized investment gains participants missed due to paying unnecessarily inflated fees,” explained Wallace.

However, Wallace hastens to add that there is hope – if appropriate actions are taken.

“Creating and maintaining a defensible position is really important because it can both mitigate risk and have an effect on the rates and coverage available in the fiduciary liability market,” he said.

How fiduciary liability limits are changing

A decade ago it was common to see $15 million to $25 million limits for fiduciary liability coverage from a single carrier. Today, however, it is more common to see limits between $5 and $10 million.  There are changes involving increased self-insured retentions too, specifically around mass action and excess fee claims, as well as rising premiums.

This topic started to land on radars as far back as 2006, but really took center stage around 2015, Wallace explains. There were many large settlements that year.

Why are retirement plans such a target?

Retirement plans, like 401k plans, tend to have 1,000s of participants, making them ripe for class action lawsuits.

“The cases are hard to stop at the motion to dismiss stage,” said Wallace. “Generally speaking, if it’s reasonable to believe that the fiduciary has breached a duty imposed under ERISA, the burden of proof is on the plan fiduciaries to show they acted in accordance with their obligations.” Once the suit gets past the motion-to-dismiss stage, settlement talks begin in earnest to avoid costly and protracted litigation, he noted.

Helping clients create a defensible position

So how can companies create a more defensible position before a lawsuit is served?

For starters, “create a sound investment policy and ensure that the plan committee follows it,” Wallace said. “Create a prudent decision-making framework for the fiduciaries to follow when selecting service providers and investment options.”

Other tips to keep in mind:

  • Get independent advice from an expert when it comes to building your investment policy and selecting investment options.
  • Educate the plan fiduciaries, so they know what they’re doing and what their obligations are.
  • Make sure that the investment or plan committee meets quarterly, and that they are monitoring the plan’s performance against objectives.
  • Benchmark fees annually. Every few years, go out and do a request for proposals to see what services and fee structures are available.
  • Strive for a record-keeping fee that is fixed per participant, as opposed to being based on a percentage of the assets under management.
  • Focus on creating a balanced selection of options, including low-cost index funds, while being mindful of actively managed funds, and what those expense ratios look like.

The plan committee should memorialize what services they value in the chosen providers. “If you can document that, saying, for example, ‘We chose to pay more because they have better investment tools for our employees to use,’ that can be genuinely meaningful in stemming any losses should litigation arise,” said Wallace. “Make sure you’re keeping records on the meetings outlining the selection process and how you’re monitoring the plan.”

How brokers are playing their part

Wallace had praise for brokers whom he feels are doing “a great job” of helping their clients deal with risk surrounding fiduciary responsibility.  “Get a client to prepare a robust fiduciary insurance submission,” he said, “because it can go a long way with the underwriter.”

In his role, if he gets a submission on a fiduciary risk with a large plan, it will generally come with fee disclosures, a robust application and even an excessive fee questionnaire outlining specifics around fee structures and service providers. But that does not tend to happen as often with submissions for plans with less than $1 billion in assets. There is now a recognition that “the litigation has shifted and that there is exposure as low as $100 million in plan assets,” Wallace said. “Transparency is key for us. A comprehensive submission, independent of the plan size, is becoming table stakes for differentiation.”

He is also quick to point out to brokers that “the appetite for this risk can vary from carrier to carrier and it’s a good idea to scan the market and see what’s out there.”


This article provides general information, and should not be construed as specific legal, HR, financial, insurance, tax or accounting advice.  As with all matters of a legal or human resources nature, you should consult with your own legal counsel and human resources professionals.  The Hartford shall not be liable for any direct, indirect, special, consequential, incidental, punitive or exemplary damages in connection with the use by you or anyone of the information provided herein.

Certain coverages vary by state and may not be available to all businesses. All Hartford coverages and services described on this page may be offered by one or more of the property and casualty insurance company subsidiaries of The Hartford Financial Services Group, Inc. In Texas, Arizona, New Hampshire, Washington and California by Hartford Accident and Indemnity Company, Hartford Fire Insurance Company, Hartford Casualty Insurance Company, Hartford Lloyd’s Insurance Company, Hartford Insurance Company of the Midwest, Navigators Insurance Company, Navigators Specialty Insurance Company, Maxum Casualty Insurance Company, Maxum Indemnity Company, Trumbull Insurance Company, Twin City Fire Insurance Company, Hartford Underwriters Insurance Company, Property and Casualty Insurance Company of Hartford and Sentinel Insurance Company, Ltd. and its property and casualty insurance company affiliates, One Hartford Plaza, Hartford, CT 06155.  

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