Experts offer suggestions to mitigate risk of fee lawsuits

Defined contribution sponsors can't prevent ERISA fee lawsuits, but insurance experts say there are many ways to reduce the risk of lawsuits and, in doing so, improve their chances for more favorable rates for fiduciary liability insurance.

Euclid Specialty Managers LLC offers prospective clients a checklist of best practices to reduce their risk of ERISA fee lawsuits, said Daniel Aronowitz, the Vienna, Va.-based managing principal of the company, which only accepts 25% of sponsors' requests for fiduciary liability coverage. "We only cover plans that have good fiduciary best practices," he said.

His firm recommends clients and prospective clients study excessive fee cases to determine the most likely lawsuit targets — record-keeping fees, investment option fees and retention of poor-performing investments.

"We do not claim to have a magic bullet or formula," says the Euclid checklist. For plans with $100 million or more in assets, the highest risk of a lawsuit is caused by offering retail shares when institutional shares are available, providing actively managed target-date funds, and paying record-keeping fees based on a percentage of assets with uncapped revenue sharing, the checklist says.

"If you have an indexed target-date fund and lower share classes, you should get better premiums and a lower retention," Mr. Aronowitz said. Retention is the industry term, similar to a deductible, for the amount sponsors must pay before fiduciary liability coverage takes effect.

Although his firm recommends that sponsors eliminate revenue-sharing, Mr. Aronowitz said plans that keep the feature should place a cap on the amount given to the record keeper for administrative services.

Among Euclid's other checklist items, it recommends that sponsors:

• Pay the record-keeping fees or charge a flat per-person fee if sponsors want participants to bear the cost.
• Conduct record-keeping RFPs every three years.
• Make the qualified default investment alternative an indexed target-date fund series.
• Ensure that consultants/advisers provide an adequate benchmarking for managed account fees.

"A strong, prudent fiduciary process that is clearly documented is key," Alison Martin, the Pittsburgh-based fiduciary liability product manager for Chubb Ltd., wrote in an email. "Fiduciaries should have regular meetings to discuss plan administration and investments."

Having up-to-date plan documents and disclosure are important, but so are "appropriate minutes of their plan meetings and important plan decisions," she added. "Otherwise, plans may have prudent processes in place but no evidence of same."

Fiduciaries also shouldn't be shy. They "should ask questions about anything they don't understand and push back on matters that don't make sense to them," she wrote. "Fiduciary training is an excellent way to help ensure processes and documentation are prudent."