Litigation over retirement plan fees has been on the rise in recent years. Since 2020, there have been more than 170 such suits, breaking previous records. And while these cases used to affect mostly larger plans, smaller plans with fewer assets have become targets of aggressive prosecutors. Defense costs for such cases often exceed several million dollars — with some lawyers insisting on retainers of up to $15 million. Settlements and damages awarded to plaintiffs can also easily reach the multimillion-dollar range.
The 401(k) industry is heavily regulated, and legal movement in this sphere can have severe consequences. Fee-driven lawsuits could be highly damaging — and even ruinous — for smaller organizations, but regular benchmarking and prudent plan design can help you mitigate a number of risks.
Large Settlements
The average settlement amounts for 401(k) plan fee lawsuits have been steadily rising. According to Bloomberg Law, the average settlement since 2020 has ranged from approximately $500,000 to $4 million. Unfortunately for sponsors, this trend doesn't show much sign of abating in the near term. For growing businesses, settlement amounts in this range could disrupt operations for years, or even halt them entirely.
Defense Costs
Defense costs can be incredibly expensive for plan fee lawsuits. Many defendants have found their plan insurance doesn’t begin to cover legal costs until their expenses exceed $10 million. Like a deductible for health insurance, this coverage gap can leave some businesses lacking resources to obtain adequate representation, and resolving the issue could cost as much as the settlement itself — or even more.
Reputational Damage
With public opinion so readily shared on LinkedIn, Glassdoor and other social media platforms, corporate image is paramount. If a company faces litigation because employees feel their plan was mismanaged, this could deal a serious blow to an organization’s professional reputation, especially if the suit makes headlines. Besides being costly in a material sense, reputational harm could hamper the company’s ability to draw and retain top talent and tarnish its image in the eyes of customers.
Actively Monitor Plan Fees
To avoid potential damage from excessive fee lawsuits, sponsors should take a proactive approach to ensuring their retirement plan fees are reasonable. PlanFees helps advisors easily benchmark plans in real time, and customize their report to plans with similar assets and numbers of participants. This revolutionary, fintech platform uses verified data from a robust database of live-bid pricing proposals to enable advisors to access information on investments, recordkeeping, administration and advisory fees in under two minutes. PlanFees makes it easy for retirement plan advisors to keep a close eye on their clients’ fees and help mitigate fiduciary risk. Benchmark better, and help keep legal exposure at bay, with PlanFees.
Sources
- https://www.chubb.com/content/dam/chubb-sites/chubb-com/us-en/business-insurance/fiduciary-liability-educational-materials/documents/pdf/2021-09-15_Excessive_Litigation_over_Excessive_Fees.pdf
- https://news.bloomberglaw.com/employee-benefits/spike-in-401k-lawsuits-scrambles-fiduciary-insurance-market
- https://news.bloomberglaw.com/employee-benefits/flood-of-401k-fee-lawsuits-spur-wave-of-early-plaintiff-wins
- https://www.shrm.org/resourcesandtools/hr-topics/benefits/pages/steps-to-keep-your-retirement-plan-from-being-sued.aspx
