Insights From Encore Fiduciary on Fiduciary Liability & Other Risk Exposures of Employee Benefit Plans


Insights From Encore Fiduciary on Fiduciary Liability & Other Risk Exposures of Employee Benefit Plans

Plan Committee Checklist to Reduce Your Risk of an Excessive Fee Lawsuit

excessive fee lawsuit

Plaintiff law firms continue to file excessive fee lawsuits at a record pace.  These lawsuits allege that plan fiduciaries are allowing plan vendors to take advantage of the plan participants by charging excessive fees.  Because plan participants cannot sue plan recordkeepers or investment advisors directly, the plaintiff business model is to sue plan fiduciaries.  These lawsuits allege millions of dollars of purported lost retirement savings to participants, and are expensive and burdensome to defend.

The typical advice offered to plan sponsors is to have and follow a good investment policy statement and to carefully document the reasons for their decisions.  See, e.g.,  If you follow and document a sound fiduciary process, the thinking goes, then you will protect your plan against excessive fee litigation.

The problem is that the plaintiff law firms know nothing about your fiduciary process.  They are searching filed Form 5550 data from two years ago and seeking recordkeeping fees and investment options that they think are too high.  Then they send an ERISA section 104(b) disclosure request for plan documents relating to recordkeeping and investment options and fees.  From this scant documentation, they file excessive fees lawsuits claiming that the plan (1) paid too much for recordkeeping; (2) too much for investment options; and/or (3) that the plan maintained under-performing investment options.  With this circumstantial evidence, plaintiffs speculate that the plan process must have been imprudent.  Most federal courts have been sympathetic to these claims, allowing them to proceed to the expensive discovery phase of litigation in which plaintiffs have leverage to drive a large settlement.

Your plan committee can have the most diligent process for choosing and monitoring plan administration and investments, but that will not prevent an excessive fee lawsuit.  We have found that even plans with the best consultants and quality 3(21) and 3(38) fiduciary investment advisors still get sued.  Instead, the most effective way to reduce your risk of excessive fee litigation is to read the dozens of excessive fee cases to see the type of risk factors that lead to case filings and to make changes accordingly.

While we do not claim to have a magic bullet or formula, based on our review of the last five years of excessive fees cases, the highest indication of whether your plan (if over $100m in assets or with 2,500+ participants) has a high risk of excessive fee litigation is:  (1) if your plan is in retail share class of investment options when lower-cost institutional share classes are available; (2) if your plan has an active suite of target-date investments; and (3) if your plan has recordkeeping fees on a percentage of asset basis with uncapped revenue sharing.

If you do nothing else, addressing these three issues will reduce your chances of being sued.  You still have exposure from the prior six years of your plan’s structure, but it pays to make changes that de-risk your plan.

To further de-risk your plan, we provide the following checklist for all fiduciaries on their plan committee.  We recommend that you bring this list to your next plan committee meeting, and ask your plan consultant how your plan addresses each of these fiduciary risk factors.

The Euclid Excessive Fee Checklist
Watch The Euclid Excessive Fee Checklist video

  • Does the Plan Sponsor Pay for Recordkeeping Fees? The best way to eliminate a challenge to the level of your plan’s recordkeeping fees is for the plan sponsor to pay for participant’s administration costs.  For $30-60 or so per participant, you can eliminate $500,000 – $5,000,000 of exposure, depending on the size of your plan.  It will also help you secure more favorable fiduciary liability insurance to pay the recordkeeping fees.  Take the issue off the table and pay the recordkeeping fees for plan participants.
  • Is the Recordkeeping Fee on a Low, Flat Fee Per Participant? If participants pay the recordkeeping fee, make sure that it is on a low, flat fee per participant that is fully transparent.  This fee should be compared to other companies of similar plan size to ensure that the recordkeeping fee is reasonable.
  • Use an RFP every three years to bid out your recordkeeping: Plaintiffs argue that the best way to reduce plan administration fees is to do frequent requests for proposals in which the services are subject to competitive bidding.  In an ideal world, plan benchmarking from quality consultants should be enough, but go the extra step and require an RFP to get the lowest possible recordkeeping fee per participant.
  • Have you eliminated or capped revenue sharing? Revenue sharing is when the plan investment provider shares a portion of the investment fee with the recordkeeper to compensate the recordkeeper for the administrative services.  But it only helps plan participants when it reduces the overall recordkeeping fee.  The best practice in the current environment is to eliminate all revenue sharing – again, take the issue off the table so that you do not have to defend the practice.  If you still have revenue sharing, make sure it is capped and calculate the overall recordkeeping fee so that it is reasonable.  Do not allow a percentage of asset fee to grow above a reasonable amount when plan assets grow large.
  • Are you in the lowest possible institutional share class for every investment option? This is the number one risk factor for excessive fee litigation.  Plaintiff firms look for common investments and check if your plan is in the lowest institutional share class.  For example, Fidelity has multiple share classes with lower fee options:
Class 1
Class 2
Class 3
Fidelity Blue Chip Growth Fund FBGRX .79 .70 .45 .43 .38 .35


Plaintiff firms are looking for any investment option in Fidelity Class K shares or T. Rowe Price I Shares, for example, and alleging that your plan is not reducing plan expenses.  In your plan committee meeting, make sure your investment advisor or plan consultant has certified that every investment is in the lowest share class possible.  Next, ask whether CIT options offer lower fees and make sense for your plan.  Do you offer index funds for every investment category?  In an ideal world, plans can offer active funds to try to beat the market.  But plaintiffs are armed with studies that active managers cannot beat lower cost index fund total returns.  Courts are often sympathetic to this argument.  Do not take on this unnecessary fight.  Make sure your plan has low-cost index options for every investment category.  Better yet, make index options the predominant investment option for your plan participants.

  • Is your QDIA in a low-cost index fund? Similar to question #5, make sure your default option for the plan is a low-cost index fund that is in the lowest share class for which your plan is eligible.
  • Are the Target-Date Funds in a low-cost index fund? The second key risk factor for excessive fee litigation is when plans offer target date suites with active investment management.  Excessive fee lawsuits have targeted Fidelity Freedom, T. Rowe Price, Wells Fargo, Northern Trust and other active target-date funds.  The key allegation is that participants are subject to higher fees in actively managed plans that have not matched the index target-date fund benchmark.  We highly recommend that your plan use index-based target-date funds in the lowest eligible share class.  While many of these active target-date suites have good investment results, you are still taking on higher litigation risk if you chose an active target-date suite.  Even if you document your sound rationales for choosing the active suites, such as higher historic performance, your litigation risk is higher with active investment options.
  • Are your investment options related to the plan recordkeeper? Most recordkeepers require investments sponsored by their companies.  The best practice is to offer investments that are not sponsored by your recordkeeper.  But if your recordkeeper has investments in the plan, you need additional due diligence to ensure that the investment fees are the lowest possible and the investment performance is sound.
  • How are you benchmarking your managed account fees? The newest wave of excessive fee claims is that plan fiduciaries are allowing the managed account provider to charge an excessive fee.  Ask your plan consultant how they are evaluating whether the managed account option has a proper fee.
  • How are you monitoring investment performance, and eliminating underperforming investment options? The most insidious claim in excessive fee litigation is that plan investment options are underperforming.  The reason is that plaintiffs are usually comparing the challenged investment to a Vanguard 500 Index or some other investment in which the strategy is not comparable.  And most target-date funds cannot be reliably compared against a benchmark, because performance is based on the percentage of stock in the target-date suite, which varies by option and provider.  But many courts allow these unfair benchmarks.  There is no silver bullet for monitoring investment performance.  This is one area in which following and documenting plan investment processes is your only protection.  Most consultants do not recommend making frequent investment changes, but pointing to investment changes based on investment monitoring is the best way to show fiduciary diligence.


Even the best plan fiduciary process and documentation will not insulate your plan against the high frequency of excessive fee litigation.  The reason is that plaintiff law firms know nothing about your fiduciary process and are speculating based on the limited information they find in public plan filings.  The best defense is to reduce your chance of being targeted by:  (1) offering only the lowest-cost institutional share class investments; (2) offering primarily index investment options, particularly for the target-date suite; (3) requiring the plan sponsor to pay all recordkeeping fees, or ensuring that plan recordkeeping fees are on a low, flat, per-participant structure that does not increase as plan assets grow; and (4) requiring a full RFP on a regular basis, but at least once every three years.  Diligently documenting your decision-making processes for all plan decisions remains an important fiduciary responsibility, but documentation alone will not prevent you from being targeted (and sued) if your fees are high.  We recommend that plan fiduciaries bring the Euclid Excessive Fee Checklist to your next plan committee meeting, and start de-risking your plan.


Disclaimer:  The Fid Guru Blog is intended to provide fiduciary thought leadership and advocacy for the plan sponsor community in areas of complex fiduciary litigation.   The views expressed on The Fid Guru Blog are exclusively those of the author, and all of the content has been created solely in the author’s individual capacity.  It is not affiliated with any other company, and is not intended to represent the views or positions of any policyholder of Encore Fiduciary, or any insurance company to which Encore Fiduciary is affiliated.  Quotations from this site should credit The Fid Guru Blog.  However, this site may not be quoted in any legal brief or any other document to be filed with any Court unless the author has given his written consent in advance.  This blog does not intend to provide legal advice.  You should consult your own attorney in connection with matters affecting your legal interests.

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