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Since 2020, there has been a major uptick in excessive fee litigation against fiduciaries in higher education in connection with the administration of retirement benefit plans. These suits allege that fiduciaries are failing to properly monitor against the charging of fees that are in excess of those in their plans’ guidelines. Plaintiffs claim that a lack of proper fiduciary oversight or investment analysis to make proper changes for initial investments jeopardizes beneficiaries’ ability to collect expected retirement plan benefits.
More commonly found in large corporate investment communities, these types of allegations are increasingly seen in litigation filed against top and second-tier universities bringing with them significant litigation costs and making it essential to investigate proper changes to investment programs and solidify fiduciary liability coverage
Retirement plans with tax advantages offered through higher education institutions are often considered to be structurally bloated. The plans themselves have both fixed and variable annuities in addition to the mutual funds, housing many different investment options for participants. They are typically run through many different types of recordkeepers and have large investment menus due to shared arrangements between several annuity providers and university beneficiaries. Furthermore, higher ed retirement plans have changed over time to offer additional mutual funds with investment companies that act as another recordkeeper.
The fees for recordkeeping services are charged as a fixed dollar amount or in accordance with the size of assets, as well as the number of participants involved.
Allegations have risen out of plaintiffs believing that fiduciaries have dropped the ball in their management of plan benefits, specifically in allowing plans with asset-based fees to skyrocket. These plaintiffs frequently assert that having multiple recordkeepers leads to uncapped revenue sharing from investment plan participant fees. These allegations often state that this muddies competition for recordkeeping services, which forces participants to pay higher fees in comparison to other services within the market.
Excessive fee litigation has quadrupled in the higher education space since 2020. Historically, allegation targets were massive corporations with plans that featured over a billion dollars in assets, but smaller boutique law firms have found success in generating large settlements from excessive fee litigation in higher education, attracting more firms to pursue similar suits.
The massive increase in litigation, including defense and settlements of claims, are pushing costs ever higher. Even in cases of early dismissal or defendants winning against their plaintiffs, these lawsuits can be costly for targeted fiduciaries.
Premiums for fiduciary liability coverage are also on the rise. As more litigation targets allegedly excessive plan fees, carriers push premiums higher to keep pace with the costs of litigation and settlements. The effects of this increase in litigation are, in turn, changing the process of renewals. For many plan fiduciaries, questions about policy limits and the stringency of policy provisions are becoming top of mind, particularly regarding selection of appropriate counsel. In this litigious environment, the best defense is having adequate fiduciary liability coverage in place as well as taking appropriate measures to mitigate any additional risks.
In addition to the rise in premiums, carriers are also enforcing a separate excessive fee retention and/or securities retention or excessive fee litigation retention in conjunction with making premium increase determinations.
Plan fiduciaries should focus on building a strong defense that mitigates the risk of litigation. The following steps are an excellent starting point:
Beyond keeping books and records tightly monitored, it is important for plan fiduciaries to maintain a level of transparency with beneficiaries, to build a foundation of trust. If more plan fiduciaries follow best practices, litigation is apt to decline and have a positive impact on insureds’ fiduciary liability insurance renewals.
Want to learn more?
Connect with the Risk Strategies Management Liability team at MLPG@risk-strategies.com.