Solving the Retirement Plan Liability Insurance Puzzle

When employers that sponsor retirement plans received their 2021 insurance renewals for fiduciary liability coverage, they were also likely to have received some unpleasant surprises: higher liability insurance premiums, caps on liability coverage, more restrictions and exclusions, higher risk-retention levels, or, sometimes, all of the above.

As a result, employers increasingly face difficult decisions about buying liability coverage.

Reviewing the Basics

Fiduciary liability insurance protects an organization and its named benefit plan fiduciaries (who oversee plans that manage employees' money, such as 401(k) and similar retirement plans) against lawsuits by plan participants alleging a breach in fiduciary duty under the Employee Retirement Income Security Act (ERISA). Members of an employer's plan oversight committee, for example, are typically named as plan fiduciaries who are personally liable for mishandling plan management, such as selecting or failing to remove underperforming mutual funds from the plan's investment menu.

Depending on an organization's size and the value of assets in its benefit plans, "policy retention levels range from $50,000 or $100,000 to $1.5 million or more with very significant increases in premiums [for 2021], in some cases up to six figures," said Rob Yellen, fiduciary liability insurance product leader with Willis Towers Watson in New York City.

Litigation on the Rise

The reason fiduciary liability coverage is becoming more expensive and restrictive, Yellen said, is that more retirement plan sponsors are being sued over breaches in their fiduciary responsibility to retirement plan participants, and many of these cases are being settled for considerable sums. For example, a case filed against Anthem Inc.'s 401(k) plan for charging participants excessive fees was settled for more than $23 million. Among recent actions, a class-action lawsuit was filed in August 2020 alleging that LinkedIn mismanaged its 401(k) plan. The following month, a federal judge rejected a petition by AutoZone to dismiss allegations of ERISA violations filed by 401(k) plan participants.

Proposed class actions challenging 401(k) plan fees were on track for a fivefold increase between 2019 to 2020, according to a Bloomberg Law analysis. More than 60 cases were filed in the first eight months of 2020, compared to about 20 in all of 2019.

"With more employees at home during a tumultuous year, many individuals had time to spend anxiously watching the volatile markets and ponder their retirement plan performance and fees," wrote Michael Webb, vice president at retirement plan advisory firm Cammack Retirement Group in Newton, N.J. As a result, last year saw a rising number of lawsuits filed against employee retirement plans, "with the majority filed after the pandemic began in March," he noted.

Last year saw a rising number of lawsuits filed against employee retirement plans.

Fiduciary liability lawsuits were once relatively rare. However, insurers' focus on settling these cases instead of taking them to court and the size of the settlements encouraged more law firms to look for plans to target.

"The success of law firms pursuing a few cases attracted more capital to drive more litigation," Yellen said. As a result, some fiduciary liability policies now exclude coverage in the event of a class-action lawsuit.

"I don't see signs of this litigation stopping," said Carol Buckmann, a partner with law firm Cohen & Buckmann in New York City. "It is a troublesome longer-term trend, and there is no such thing as a safe space in terms of fiduciary liability."

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A New Normal

Employers have options to push back against more restrictive coverage terms and higher pricing for fiduciary liability coverage. The best approach is to present a strong case that the employer's plan is well-run and follows fiduciary best practices.

"Most carriers are not trying to be creative; they are playing defense," said Daniel Aronowitz, managing principal of Euclid Specialty Managers LLC in Vienna, Va. He advised that they can be their own best advocate by providing more information about the plan and its practices.

To determine the best way to manage fiduciary insurance increases, employers can ask the same questions insurance underwriters ask:

• Has the organization had any ERISA violations?
  

• When was the last time the organization put out a request for proposals (RFP) for retirement plan services?
  

• Does the organization pay retirement plan record-keeping fees, or are those services paid for out of plan assets?
  

• Does the organization seek outside assistance when choosing and evaluating the retirement plan investment options?

If a retirement plan has had lax fiduciary processes in the past, employers can show how they have addressed these issues. "Be more thoughtful and show what you are doing," Aronowitz said. "If you fix problems, you may get better coverage."

Employers will have a better case for better coverage terms and pricing if they can show, for example, that they conduct quarterly reviews of investment performance versus relevant benchmarks, regularly send out RFPs to make sure plan fees and services are aligned with the market, and disclose plan fees.

Regarding coverage, employers may have to accept policies with lower coverage caps, more exclusions and higher deductibles than they would have in the past. With premiums increasing significantly, employers may have no choice but to accept basic coverage in order to make the policy more affordable.

"Don't just call your broker. Look around to find what's available in the market," Buckmann advised. "There could be significant differences in coverage."

[SHRM members-only toolkit: Designing and Administering Defined Contribution Retirement Plans]

Additional Protection

Simply buying fiduciary liability insurance is not enough to protect the organization from litigation and related costs. Employers should be examining their retirement plans for potential weaknesses and addressing any problem areas quickly, taking actions such as the following:

• Build and reinforce compliance frameworks.

Ensure that plan administration and compliance are being effectively handled at all times. Smaller plans, in particular, can benefit from a stronger compliance framework. This can include regularly analyzing how the plan compares to those maintained by the employer's peers and ensuring compliance and administrative controls are in place and operating as expected.

Taking and retaining notes about all fiduciary activities and decision-making is also good practice. This way, if an employer faces questions about retirement plan fiduciary matters, the documentation can provide evidence that the employer has fulfilled its fiduciary responsibilities and compliance requirements.

• Audit the plan regularly.

Consider hiring a consultant to conduct a fiduciary audit of the retirement plans, including investment choices and fees related to both record-keeping and investment management. "Audit the plan at least every three years to show that you have gone to market and demonstrated that you have sought the lowest possible fees," Aronowitz recommended. Fees for mutual fund investment management and plan administration "have come down over the past three years," he explained, so it's important to show that the employer has asked for and received the lowest possible fees and the lowest-cost share class in the plan's investments.

• Consider a pooled employer plan.

Newly available pooled employer plans (PEPs) allow employers to transfer some of their fiduciary risk to a pooled plan provider (PPP). Introduced as part of the Setting Every Community Up for Retirement Enhancement Act, PEPs allow employers to pool their defined contribution retirement plans within a single PPP responsible for the administration, management and fiduciary requirements of the plan. The employers participating in the PEP will still have fiduciary responsibility for hiring and monitoring the PPP, however.

• Pay plan fees.

Employers can eliminate some fee-related fiduciary risk by paying for certain plan fees themselves rather than requiring those fees to be paid out of plan assets. "Employers can consider paying more freight for the plan," Aronowitz suggested. "[Mutual fund] investment fees are paid by plan participants, but record-keeping fees do not have to be charged to plan participants."

If the employer is paying those fees, less fiduciary risk is involved.

Evolving Risks

The one thing employers should not consider is forgoing fiduciary liability coverage entirely. With the success of retirement-plan-related lawsuits, more attorneys are entering the arena and expanding the number of plans that are being targeted—even small and midsize plans.

New areas of fiduciary liability risk also are emerging, such as those related to cybersecurity. In addition, plan sponsors may face questions about how they met their fiduciary responsibilities during the COVID-19 pandemic, such as handling notices of COBRA eligibility and questions related to investments in and withdrawals from retirement plans.

"Get as much coverage as you can because you have never needed it more," Willis Towers Watson's Yellen advised.

Related SHRM Articles:

Viewpoint: How to Minimize the Risk of Retirement Plan Litigation, SHRM Online, September 2020

Shore Up Benefits Cybersecurity During Open Enrollment, SHRM Online, September 2020

COBRA Notice Litigation Mushrooms, Along with Settlements, SHRM Online, March 2020