The basic claim in fee-related litigation situations, most of which are filed as class action lawsuits, is that the plan sponsor is violating the Employee Retirement Income Security Act of 1974 (“ERISA”) by paying too much for recordkeeping and administrative sets.
Some ERISA lawsuits over fees also allege that the plan sponsor failed to remove poor-performing investments from the funds being managed. Another shared allegation is that the plan sponsor failed to choose lower-cost proportion classes (like institutional shares) for the investment menu.
An industry practice known as “revenue sharing” has also been criticized. In this example, a fund manager might proportion fees with a recordkeeping service to cover unrelated marketing expenses.
Collectively, the fees allegedly harm the plan participants by reducing the return that would otherwise be earned on their retirement funds.
The Chubb / Groom report indicates two emerging trends in excessive fee litigation:
One reason for the increase of situations, according to the report, may be the natural evolution of the excessive fee litigation strategy. As a small number of law firms became successful with what was initially a novel basis for legal action, other law firms took observe. The library of materials generated by the first wave of excessive fee situations-in the form of complaints, pleadings, motions, and legal research-served to give smaller plaintiff firms that afterward entered the market many of the resources they needed to formulate similar actions.
Characteristics of Funds Targeted in Excessive Fee situations
There are several shared industry practices that might consequence in a plan sponsor being unprotected to litigation, according to the Chubb / Groom report. These actions include but are not limited to the following:
Recommended Actions for Retirement Fund Managers
According to the report, plan sponsors might be able to reduce their litigation risk with the following types of actions:
Risk avoidance is always a priority in managing a plan unprotected to ERISA regulations. For this reason, the Chubb / Groom report also recommends that plan sponsors have adequate levels of fiduciary liability insurance. Employee benefits liability coverage alone typically does not apply to an excessive fee case. Plan sponsors are advised to work with legal and insurance experts to clarify appropriate levels of insurance coverage, particularly since plan fiduciaries might be held personally liable if it is determined that fiduciary obligations are not met.
meaningful Excessive Fee Case Settlements
Litigation involving fees can take many years to resolve, which can be expensive in terms of both litigation costs and settlement fees. Some notable settlements for excessive fee litigation are noted below.
These are just a few of the many settlements reached in ERISA fee litigation matters.
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