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Protecting Your Assets: Decoding Excessive Fee Claims with Fiduciary Liability Insurance


In the complex world of Fiduciary Liability Insurance, the specter of excessive fee claims looms large. These claims, which allege breaches in fiduciary duties under the Employee Retirement Income Security Act (ERISA) involving retirement plans like 401(k)s, are not only increasingly common, but also carry the potential for multimillion-dollar settlements and costly defenses. In this blog post, we delve into the essentials of excessive fee claims, explore the vital role of Fiduciary Liability Insurance, and provide strategic insights for both understanding and mitigating these risks.  

The Rising Tide of Excessive Fee Claims:   

First, let’s set the scene. Excessive fee claims are serious allegations against fiduciaries and sponsor organizations managing retirement plans governed by ERISA. These claims often hinge on two pivotal accusations: fiduciaries not ensuring plans pay only reasonable fees for necessary services, and failing in their duty to prudently select investment options.  

Since 2020, there have been 298 Excessive Fee Claims filed in federal court, including 48 in 2023 targeting large funds and smaller plans, highlighting the growing pertinence of this issue.  

Fiduciary Liability Insurance: Your Shield in Turbulent Waters:   

This brings us to the superhero of our story: Fiduciary Liability Insurance. Unlike the more limited Employee Benefit Liability coverage found in General Liability policies which only covers Administrative errors and omissions claims, Fiduciary Liability Insurance offers a comprehensive safeguard. It covers the Administrative E&O – such as enrollment and termination mistakes – as well as the critical Discretionary Actions governed by ERISA. This includes the review, selection, implementation, and monitoring of investment vehicles, precisely where many excessive fee claims find their footing.  

The value proposition here is stark: for just a increased premium over what many pay for Employee Benefit Liability, businesses can secure robust Fiduciary Liability coverage. This upgrade is not just wise risk management; it’s a strategic necessity in today’s litigious environment.  

Best Practices to Mitigate Excessive Fee Claim Risks:   

Awareness and proactive management are key in mitigating the risk of Excessive Fee Claims. Here are some best practices:  

  1. Conduct Regular RFPs: Ensure fairness in fees and services by issuing a Request for Proposal (RFP) for the initial engagement of a fund and periodically rerunning RFPs for record keepers, mutual fund expenses, etc.  
  1. Transparency in RFP Processes: Clearly disclose fee structures to participants, emphasizing fixed fees per participant over asset-based fees.  
  1. Negotiate and Monitor Fees: Actively negotiate fees and offer diverse, transparent investment options.  
  1. Vet Mutual Funds: Investigate funds for potential revenue-sharing issues and prior excessive fee claims.  
  1. Hire and Consult Experts: Utilize independent experts for plan servicing, record-keeping, and benchmarking.  
  1. Meticulous Documentation: Maintain thorough records of all due diligence processes.  
  1. Regular Investment Committee Reviews: Conduct quarterly meetings to review and respond to plan performances.  
  1. Independent Benchmarking: Obtain unbiased independent benchmarking of expenses and results. Do not rely on the fund’s own benchmarking reports.  
  1. Legal Safeguards: Secure hold-harmless agreements and indemnifications against excessive fee claims from the mutual funds, if possible.  
  1. Adequate Fiduciary Liability Insurance: Ensure your coverage aligns with your plan’s size, participant numbers, and investment risk.  

Overall, in the complex realm of fiduciary management, Excessive Fee Claims represent a significant risk. However, with the right knowledge, procedures, strategies, and the protection through Fiduciary Liability Insurance, organizations can navigate these challenges effectively. By embracing best practices and ensuring robust coverage, fiduciaries can focus on their core mission: managing assets responsibly and in the best interests of their beneficiaries.  

Call to Action: Are you fully equipped to face the challenge of excessive fee claims? Contact Bill Holden, SVP (Executive Liability Practice Leader), The Liberty Company Insurance Brokers, to discuss how Fiduciary Liability Insurance can fortify your organization against these risks. Remember, in the world of fiduciary responsibility, being proactive isn’t just advisable – it’s essential.  

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