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September 20, 2021 12:00 AM

Sponsors rocked by fiduciary insurance hikes

Double-digit premium increases common amid growing ERISA suits

Robert Steyer
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    Erupting ERISA litigation is forcing defined contribution sponsors to endure higher fiduciary liability insurance premiums, with some renewals costing double or triple and most averaging double-digit increases.

    And that's only part of the pain. Sponsors are paying more out of pocket before their insurance policies take effect and insurers are asking more detailed questions about corporate governance and plan management practices than in the past.

    Meanwhile, the outlook next year is for even higher premium increases.

    "It is a challenging market," said Rebecca Dauparas, Chicago-based senior vice president for Arthur J. Gallagher, a risk management, insurance brokerage and consulting firm.

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    Earlier this year, her company forecast that average fiduciary liability premiums would rise 15% to 30% this year. "Now it's more like 20% to 30%," she said.

    Next year, her firm predicts average premium increases of 25% to 40%. The firm's assessment is based on quarterly discussions with large providers of fiduciary liability insurance as well as monthly meetings internally to review clients' and carriers' "appetites" and actions, she said.

    Ms. Dauparas said some higher education institutions are paying 100% to 200% higher renewal premiums for their 403(b) plans. They historically had lower premiums than for publicly traded companies and because 403(b) plans weren't being sued for ERISA violations until five years ago. "Consequently, carriers had not been adjusting fiduciary insurance terms prior to 2016 for this segment," she explained.

    Ms. Dauparas and other insurance experts attribute the growing fiduciary liability insurance pressures to a general increase in ERISA lawsuits that spiked in 2020.

    Plaintiffs' attorneys also have increased their challenges to DC plans with assets of less than $1 billion.

    "No industry sector is immune," said Jay Desjardins, the Radnor, Pa.-based national fiduciary liability practice leader for Aon Financial Services Group, a unit of Aon PLC. "There is a common misperception that plaintiffs target jumbo plans over $1 billion."

    According to Aon, at least 135 ERISA excessive fee lawsuits were filed since January 2020 with all but a handful being against DC plans.

    There were 95 lawsuits in 2020 and 40 suits this year through August, according to Aon's research, which also shows at least 290 excessive fee lawsuits have been filed since 2005.

    More than 40% of the 135 lawsuits were against plans with assets below $1 billion, Mr. Desjardins said. Of the 135, he added, 20% were against plans with less than $500 million in assets.

    "We anticipate the (premium increase) trends will continue through 2021 and into at least the first quarter of 2022," he said.

    When Aon polled 12 large fiduciary liability insurance providers, it asked what factors "typically impact pricing" for liability insurance.

    An overwhelming majority said a "significant" influence on insurance premiums was whether a plan's investment committee does periodic plan administration benchmarking reviews, according to a July report. This question covered both DC and DB plans.

    When asked specifically about DC plans, the report noted that company stock "remains a top concern for insurers." Most respondents cited concerns if a plan offered company stock with no investment limit for participants. That concern dropped significantly if plans placed a limit on participants investing in company stock. "This should come as no surprise given the history of lawsuits related to company stock," the report said.

    Beyond premiums

    And the insurance squeeze on sponsors goes well beyond higher premiums. For example, retentions — which are similar to deductibles — have risen recently too.

    "Historically, a majority (of insurers) had zero" in retentions, Ms. Dauparas said. "Now, we're seeing $1 million to $5 million."

    Rising retentions "happened quickly," starting about two years ago, she said. At least one insurer imposed a $15 million retention. She declined to identify the company.

    Mr. Desjardins said Aon's research shows DC plans managed by publicly traded companies now can see retentions range from $2.5 million to $15 million — quite a bit more than the $250,000 to $1 million that was once more common.

    Higher insurance costs can affect DC plans in many ways.

    "Generally, insurance costs are paid by the plan sponsor," said Sam Henson, chief client officer for Lockton Inc., Kansas City, Mo., an insurance brokerage that also provides risk management, benefits and retirement services. "However, many plan sponsors factor this expense into their total expenses related to their retirement plan 'spend.' Increasing insurance costs can result in fewer participant services, and in some cases, lesser employer contributions."

    Higher litigation costs and insurance costs force sponsors to make difficult decisions. "Sponsors are asking, 'What can I do to keep me out of court?' not 'What can I do to innovate?'" Mr. Henson said.

    Those innovations — such as auto features, managed accounts and re-enrollment into target-date funds — "come at a cost of either additional employer dollars or additional administrative oversight and effort," he said. "When employers most focus solely on risk management, employees are denied the benefit of these innovations, and that ultimately leads to less favorable retirement savings."

    As litigation risk rises, DC sponsors "are reluctant to veer from mainstream investment strategies or vendors for fear of being targeted by plaintiff firms," said Ms. Dauparas of Arthur J. Gallagher. "Additionally, sponsors are reluctant to make changes to their plans, such as reducing costs or switching vendors" because a plaintiff firm might interpret the action as correcting something that was allegedly wrong in the plan.

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    Under the microscope

    Even those sponsors willing to pay the higher premiums and the greater out-of-pocket costs also must deal with the rising cost — in time and money — of answering more detailed underwriting questions than they had in the past.

    Ms. Dauparas said sponsors once could satisfy underwriting inquiries by sending a plan audit and a copy of their Form 5500. Now, they're being asked to send copies of ERISA-mandated fee disclosure documents.

    "They want to see documents," said Mr. Henson, referring to insurers. He recalled one client remarking, "I feel I am being audited by my insurance carrier."

    Insurers ask about plan governance, investment strategies, formal management and investment review processes, he said.

    They also ask about company stock, revenue sharing, the offering of record keepers' proprietary products and the use of retail-priced shares vs. institutionally priced shares. These questions "mirror the litigation trends," he said.

    Mr. Henson and other sources said some insurers ask potential and existing clients about any contact with law firms active in ERISA fee litigation.

    Even when they adjust plan design and answer insurers' questions, sponsors still are unsure whether the industry can offer enough fiduciary liability insurance.

    Just a few years ago, insurers were willing to write $25 million worth of coverage for large DC plans, but it might be $5 million to $10 million, Ms. Dauparas said.

    "Insurance limits per carrier has tended to decrease over time," Alison Martin, the Pittsburgh-based fiduciary liability product manager for Chubb Ltd., wrote in an email. "Some carriers have either exited the fiduciary space or curtailed involvement in certain sectors or for risks with certain characteristics."

    Reasons for the reduced capacity include "the increase in exposure due to excessive fees, proprietary funds and company stock, as well as the unpredictability of which plans are being targeted," she said.

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