In 2022, fiduciary liability rate increases continued but slowed, with 7-figure class action or excessive fee retentions for large defined contribution plans continuing to be common. Applications and sometimes supplemental questionnaires continued to be more extensive than previously, and $5 million policy limits became more common than $10 million. Some carriers were shrinking historically large books with high claim counts, while other carriers showed interest in building up their smaller books. Notwithstanding the new heightened scrutiny, carriers have generally maintained broad coverage terms and many were receptive to endorsing on enhancements.
There were competing factors reflecting increasing or decreasing risks, depending on what indicators one focused on. The U.S. Supreme Court voted unanimously to vacate the dismissal of the excessive fee class action against Northwestern University, but then multiple federal circuit courts wrote thoughtful decisions dismissing similar complaints. High claim volume returned in 2022, but most recent settlements have been lower than previous (mostly less than $5 million as opposed to above $10 million). As we look towards 2023, experienced brokers who understand how to accentuate the positive macro factors in the litigation landscape as well as in their clients’ risk profiles have reason to hope for further rate and retention stabilization.
2022 was a year in which fiduciary insurance rates and retentions continued to increase but stabilized.
After decades of modest premiums, fiduciary rates started to rise in 2019, accelerated in 2020 and then soared in 2021. 7-figure (and even 8-figure) excessive fee/class action retentions became common in 2021. In 2022, rates continued to increase but at a slower rate. Some carriers have higher retentions just for excessive fee class actions, while others apply such retentions to all class actions. Class action retention discussions for large plans tended to be in a range between $1million and $5 million.
Excessive fee class actions were by far the largest drivers of the market:
In 2022, excessive fee class action volume returned, with 42 cases being filed in the first half of 2022 (versus only 54 in all of 2021, but almost 100 in 2020). In 2020, underwriters were initially focused solely on defined contribution plans with assets in excess of $1 billion, but increasingly in the last couple of years scrutiny widened as even plans with less than $100 million in assets were sued (although suits against small plans have not resulted in substantial recoveries). Challenged classes included financial institutions with proprietary funds in their plans, whether currently or in the past, especially if they had not yet been the subject of a prohibited transaction claim.
In the nonprofit space, large universities and hospitals saw substantial litigation, experienced some of the most substantial premium and retention increases, and sometimes struggled to find insurers willing to insure them. In addition to instituting 7- and 8-figure class action retentions, most carriers raised retentions on individual claims from near zero to 5- and 6-figures.
Underwriters have been focused on issues such as excessive revenue sharing, uncapped asset-based vendor compensation, expensive retail share class investments, expensive actively managed funds, lack of regular benchmarking and RFP processes. Furthermore, although it may seem counterintuitive, some carriers remained nervous about potential insureds who have recently improved their processes or switched vendors, rationalizing that they might be attractive targets for plaintiff firms who would make allegations about the prior period. In sum, any organization could be treated as risky by some carriers, and it has been challenging to get credit for best practices.
The U.S. Supreme Court decided the Northwestern University excessive fee case for plaintiffs.
Last year everyone was eagerly waiting for the U.S. Supreme Court to weigh in on excessive fee litigation and hopefully to clarify pleading standards. The Supreme Court issued its decision in the Northwestern University excessive fee case on January 24 (Hughes et al. vs. Northwestern University et al. 595 U.S. (2022), unanimously finding for the plaintiffs and remanding the case back to the Seventh Circuit. Unfortunately, the short opinion mainly rejected the “investment choice” defense which was accepted by the Seventh Circuit, and did not offer meaningful guidance concerning what constitutes sufficient specificity to establish a plausible pleading. For more detail, see this article on the Northwestern decision.
Since the Northwestern decision:
Initially, district courts became even more reluctant to dismiss cases on initial motion. More recently, however, the Sixth Circuit affirmed the dismissal of the excessive fee class action against CommonSpirit Health, and the Seventh Circuit affirmed the dismissal of the class action against Oshkosh Corporation. The courts in both cases stated that the Northwestern decision did not remove the requirement for courts to act as gatekeepers as to whether pleading standards are met in the first instance. Both courts quoted the most pro-defense sentence from the Northwestern decision, which pointed out that “[a]t times, the circumstances facing an ERISA fiduciary will implicate difficult tradeoffs, and courts must give due regard to the range of reasonable judgments a fiduciary may make based on her experience and expertise.” Both appellate courts found that plaintiffs, despite having pointed to other allegedly comparable but better plans and investments, had failed to establish that they were in fact comparable and indicative of likely imprudence. The Seventh Circuit cited the Sixth Circuit’s detailed decision with approval, a trend which may continue in other jurisdictions. For more detail, see articles about CommonSpirit Health and Oshkosh.
Our market perspectives concerning excessive fee litigation and other issues were reflected in our Insurance Marketplace Realities Spring 2022- Fiduciary Liability, and in our annual autumn release.
The U.S. Department of Labor focused on cyber security and launched several plan cyber audits: In April 2021, the Department of Labor (DOL) issued three pieces of guidance which provided tips and best practices to help retirement plan sponsors and fiduciaries better manage cybersecurity risks: Tips for Hiring a Service Provider with Strong Cybersecurity Practices, Cybersecurity Program Best Practices, and Online Security Tips. Not long after, the DOL initiated many audits regarding retirement plan cybersecurity practices (see DOL begins cybersecurity audit initiative). Insureds have found relevant coverage in their fiduciary and/or cyber policies.
Recently, the 7th Circuit affirmed the DOL’s victory in a cyber audit discovery dispute (Walsh v. Alight Solutions, LLC), while still being somewhat critical of the DOL for not initially being reasonable. The Court’s holdings included: EBSA does have the authority to issue administrative subpoenas to non-fiduciaries (in order “to determine whether any person has violated or is about to violate” ERISA”),and cybersecurity is within the DOL’s purview. The Court also held that it is insufficient for a subpoena target to argue that a subpoena is “burdensome” (even stating that it will take thousands of hours to respond); the target must convincingly allege that the subpoena is “unduly burdensome”, which the Court defined as requiring that “compliance would threaten the normal operation of [its] business.”
The evolution in regulatory attitude towards environmental, social and governance (ESG) investing continued
The Department of Labor’s proposed new rule regarding Environmental, Social and Governance (ESG) investing achieved final rule status: On October 14, 2021, the Department of Labor (DOL) published for comment a new rule which would undo the previous administration’s 2020 rule that was perceived as discouraging retirement plans from investing in ESG-related investment options by putting a burden on fiduciaries to justify such investments. As the DOL explained in the Supplemental Information provided when they published the rule in the Federal Register, the change is “intended to counteract negative perception of the use of climate change and other ESG factors in investment decisions caused by the 2020 Rules, and to clarify that a fiduciary’s duty of prudence may often require an evaluation of the effect of climate change and/or government policy changes to address climate change on investments’ risks and returns.”
On November 22, 2022, the DOL published the final rule and a summary fact sheet. The final rule retains the core principle that the duties of prudence and loyalty require ERISA plan fiduciaries to focus on relevant risk-return factors and not subordinate the interests of participants and beneficiaries. In particular, the final rule:
The final rule will be effective 60 days after publication in the Federal Register.
DOL request for information from interested parties: In relation to climate risk, EBSA/DOL has been considering going further than the standard discussed above and on February 11, 2022 issued a Request for Information seeking public input on how to implement a 5/20/21 Executive Order to protect pension plans from such risks. Under consideration are mandatory disclosures on Form 5500s or elsewhere concerning plan investment policies, climate-related metrics of service providers, plan fiduciary awareness of climate-related financial risk and much more. Although responses were due by May 16, 2022, EBSA hasn’t yet made further public comment on this issue.
New SEC rules seek to offer guidance to investors concerned with ESG bona fides: The SEC is looking to step up regulation concerning funds which purport to be ESG-friendly.
ESG backlash: 2022 was also the year that saw backlash against ESG, ranging from states passing laws against ESG investing (see, for example, “And Now, the ESG Backlash”) to new funds being launched with much publicity which label themselves as “anti-ESG”.
Other types of class action suits continued to be filed, besides excessive fee claims: There were class action suits involving alleged COBRA notice deficiencies and class actions involving alleged long-term market underperformance (without allegations of excessive fees). The most high profile “underperformance” cases were a wave of 11 class actions filed by one law firm against sponsors whose 401k plans include BlackRock target date funds.
There were also many cases involving benefit denials and appeals therefrom (particularly disability-related claims). There were also suits seeking to compel coverage for transgender-related medical treatments, which have had some success based on sex discrimination allegations. There were no new class actions alleging reduced benefits due to the use of outdated mortality table assumptions, although several such suits continue to be litigated.
Despite carrier concerns, employer stock class actions against public companies did not make a resurgence, while private companies continued to be targeted: Although the U.S. Supreme Court’s decision in Fifth Third Bank Corp. v. Dudenhoeffer (USSC, 12-751, June 2014) was initially seen as a mixed bag for plaintiffs, the pleading standards it established have proven difficult to meet. As a result, very few employer stock drop class actions have been filed in recent years, and those few continue to be dismissed. Nonetheless, carriers remain concerned about employer stock in plans. They will sometimes exclude employer stock ownership plans or include elevated retentions. Meanwhile, some class actions against private companies with employer stock plans arising from valuation issues were filed and not dismissed.
Aftermath of the Dobbs decision: Following the U.S. Supreme Court decision in Dobbs v. Jackson Women’s Health Organization, overturning Roe v. Wade, some companies implemented protocols to assist employees in gaining access to healthcare services they may not be able to obtain in their own states. Plan sponsors have been preparing to defend themselves against possible claims by state officials or private plaintiffs alleging that they are violating newly implemented state laws, raising questions concerning the scope of ERISA preemption in which self-funded plans will have better arguments. Plan sponsors may also face claims from participants and challenges in complying with ERISA’s technical requirements in connection with plan changes and creation. For further discussion, see Fiduciary liability exposure and insurance after Dobbs.
COVID-19 relief legislation: The American Rescue Plan Act (the Act), which was passed in March of 2021, has been providing pandemic-related financial support to families as well as temporary COBRA and Affordable Care Act subsidies. The Act also extended funding stabilization for single-employer pension plans, modifications to executive compensation rules, as well as financial assistance for certain multi-employer pension plans. So far, the Act has resulted in large payments to two critically underfunded multiemployer pension funds. In July, 2022, the White House announced that “over $40 billion in American Rescue Plan funds have been committed to strengthening and expanding our workforce.”
Defined Contribution Plan risks:
Excessive fee litigation: while there are indications that excessive fee precedent may be moving in a somewhat defendant-friendly direction, the situation will remain in flux for the near future (particularly since the U.S. Supreme Court is unlikely to hear another case on the subject soon).
The recent appellate decision in the Oshkosh class action adds momentum to the trend of courts taking a hard look at excessive fee claims at the motion to dismiss stage. The Seventh Circuit has reiterated that it is a circuit which will apply such scrutiny at the early stages (as is the case in the Sixth Circuit). This adds Illinois, Indiana and Wisconsin to the list of states in which it is clear that excessive fee complaints can be challenged at the outset (along with states in the Sixth Circuit, Michigan, Ohio, Kentucky and Tennessee). This is particularly good news since one of the highest volume filers of excessive fee complaints is based in Wisconsin (and represented the plaintiff in theOshkosh case). The only circuit to reverse dismissals since the Hughes decision is the 9th Circuit (but those decisions, one involving Salesforce.com and one against Trader Joe’s, were both short and unpublished and so not considered to be precedential), while other circuits have yet to issue post-Hughes decisions. Not surprisingly, defense counsel in pending cases have quickly submitted the Oshkosh decision as supplemental authority to be considered in relation to pending motions to dismiss (see, for example, this filing in the case against Dish Network Corporation) and motions to reconsider previous denials in the Sixth and Seventh Circuit (see, for example, McNeilly et al. v. Spectrum Health System et al.); this should help continue the momentum towards courts applying meaningful standards to excessive fee cases at the pleading stage.
ESG:Now that the DOL’s new rule on ESG investing has become final, we can expect that in 2023 fiduciaries will feel somewhat more free to consider ESG factors in making decisions concerning investments and investment options to offer. Of course, fiduciaries will still need to be careful and diligent in investigating the bona fides of such investments. On the other hand, backlash against ESG and ESG-oriented investing will continue and might gain further momentum, particularly in some states with anti-ESG legislation; this will mainly affect state pension funds which may be limited in their investment options. It seems that the anti-ESG forces are trying to set up a false choice between ESG and investment returns, since it’s unlikely that any funds are intentionally sacrificing returns in order to favor ESG funds. On the other hand, since most of the largest and most successful mutual fund sponsors support ESG initiatives and funds to some extent or other, pension plans which boycott all such sponsors will run the risk of sacrificing their returns for their philosophies.
Health and Welfare Plan risks:
Risks post the Dobbs decision: Plan sponsors that have implemented protocols to assist employees in gaining access to healthcare services in the wake of the U.S. Supreme Court’s decision in Dobbs v. Jackson Women’s Health Organization may face investigations and suits in states with anti-abortion laws. Such claims will raise serious questions concerning the scope of ERISA preemption, particularly to the extent that the state laws are criminal in nature. Self-funded plans will have better arguments that they aren’t bound by state laws, but the question may remain as to whether a particular state criminal law fits into the preemption carve-out for “generally applicable criminal law of a state”. Some employee participants might complain about benefit cutbacks, while others might complain about discrimination. Plan sponsors may also face challenges in complying with ERISA’s technical requirements in connection with plan changes and inadvertent creation of new plans. In general, most of these claims will trigger coverage for defense costs, while indemnity coverage could be limited by the scope of the “benefits” exclusion and the coverage grants for penalties. For further discussion, see Fiduciary liability exposure and insurance after Dobbs.
Pandemic and economic uncertainty: the pandemic, international conflicts, supply chain issues and inflation will all continue to have modest impact on fiduciary liability exposures, mainly indirect to the extent that challenges and uncertainties (and rising medical costs) in the economy lead to consolidation, layoffs and/or benefit reductions. In order to minimize employee unrest, employers will continue to drill down to try to understand what benefits employees value the most. Still, there may be lawsuits arising from benefit cutbacks, including increased co-payment requirements. Such suits may be considered weak since generally medical benefits do not vest under ERISA and plan sponsors can reserve the right to make changes in the absence of a basis for estoppel. Participants could be more successful with discrimination claims, depending on the categories of benefits affected. Litigation concerning coverage for treatments relating to Covid (particularly long-haul Covid) under ERISA-regulated health and welfare plans could also arise.
Defined Benefit Plan risks:
Defendants have had substantial success in defending class actions arising from alleged outdated mortality tables leading to distributions which were allegedly not actuarily equivalent, both in getting cases dismissed and in defeating class certification. Possibly as a result, there were no new such cases filed in 2022, and it seems possible that this particular litigation wave is over.
On the other hand, although according to WTW Pension Finance Watch current funding levels in U.S. DB plans remain robust despite losses in September, a sustained economic downturn could erode funding statuses and require Pension Benefit Guaranty Corporation (PBGC) intervention. If such bailouts were to occur, they would be followed by public and/or private claims against fiduciaries for causing or failing to prevent the underfunding.
SECURE Act risks:
The Setting Every Community Up for Retirement Enhancement Act (SECURE Act) amended provisions of federal law, including ERISA, to establish a new form of multiple employer plan (MEP) called a pooled employer plan (PEP), which allowed employers to join and delegate both investment and plan administration fiduciary obligations to pooled plan providers (PPPs). In 2022, an increasing number of small plans (and a few mid-sized plans) joined PEPs and this trend is expected to continue into 2023. the growing number of PEPs and PPPs will need to ensure that they have sufficient and appropriately tailored fiduciary liability insurance to address emerging exposures contemplated in PPP/PEP arrangements. Plan sponsors which utilize PEPs and PPPs will have to make it their business to ensure this.
The SECURE Act, while providing some safe harbors in connection with offering annuity investments, also created a lifetime income disclosure requirement which went into effect for the second quarter of 2022. The requirement mandates that a participant’s annual benefit statement must include an illustration of their account balance converted to a lifetime income equivalent. In 2023 we could see claims arising out of technical noncompliance with this new requirement.
SECURE Act 2.0 risks:
It is expected that the House and Senate versions will be reconciled into final legislation before the end of 2022. Whenever the final bill is passed, fiduciaries are going to have to educate themselves about the new playing field and facilitate passing on the intended enhancements to their plan participants. Plaintiff class action lawyers will be prepared to second guess plan fiduciaries. In particular, if the rules are changed to for the first time allow 403(b) plans to offer as options collective investment trusts (CITs), which often have lower fee structures than mutual funds, then plaintiffs may sue 403(b) plans which don’t do so.
Enforcement risks:
The DOL can be expected to continue to focus on plan cyber security, while also continuing its multi-year emphasis on finding and prosecuting plan sponsors which allow unreasonable delays in crediting contributions to participant accounts.
As elements of the SECURE Act become effective, and as SECURE 2.0 becomes law, the DOL will be involved in enforcing their provisions.
The Employee Benefit Security Administration (EBSA), an agency within the DOL, recovered more than $2.4B to employee benefit plans in 2021, mostly as a result of over 1000 civil investigations and audits. They have not yet published official statistics for 2022, but they are likely to be similar.
Fiduciary behavior:
In light of substantial precedent in favor of enforcing choice of venue in plans, it is likely that more plan sponsors will add such provisions into their benefit plans. In particular, sponsors with relevant connections to the 7 states in the Sixth and Seventh Circuits may be more inclined to consider adopting such provisions if they have not already. This process will be accelerated because we have seen some carriers willing to offer improved terms for clients with venue selection provisions in favorable jurisdictions.
Meanwhile, we expect to see a continued trend of further delegation/outsourcing of investment decisions to well-qualified vendors, including Outside/Independent Chief Investment Officers, seeking to maximize results and gain some potential insulation from liability. As a further important by-product of such best practices, hopefully such entities will work with experienced brokers to get maximum credit in connection with their insurance purchases.
Most carriers will continue to insist on minimum 7-figure class action retentions during 2023: carriers will continue to focus on risks to Defined Contribution plans generally and excessive fee litigation risk specifically, and to address their concerns primarily through mandating minimum retentions (but are unlikely to insist on raising retentions again on insureds who have already experienced a retention increase previously). The fact that fiduciary premiums were low for decades has made it difficult for admitted insurers to raise their rates as much as they might like, leaving retentions as the most readily available lever to adjust. Nonetheless, premiums are likely to continue to rise, but at lower percentages than in 2021.
The wave of 11 class actions filed by one law firm against sponsors whose 401k plans include BlackRock target date funds is likely to cause more carriers to focus on this exposure in their underwriting (although the BlackRock funds in question have been highly rated and Morningstar.com has published an article criticizing the lawsuits, and we might see the first of these cases dismissed in the coming months). These cases may be the reason why some carriers have amended their high retention endorsements to also include investment performance claims without excessive fee allegations.
Carriers will continue to insist on substantial applications and excessive fee questionnaires, however the information will continue to be used more to weed out difficult risks as opposed to recognizing good risks. Pro-active brokers will force discussions with carriers about streamlining the underwriting process, including shortening and focusing applications and standardizing documentation with major vendors.
Hopefully some carriers will return to focusing their concerns primarily on defined contribution plans with more than $500 million in assets, having figured out that suits against plans below that threshold have consistently resulted in low 7-figure tabs or less (several cases have been resolved through non-public individual settlements). Retentions for plans above that threshold will continue to fall mainly between $1 million and $5 million. As some carriers continue to shy away from fiduciary risks and others show interest in building new books of fiduciary business, it will be more essential than ever for insureds to work with fiduciary experts who know how to find the best terms and pricing fits for their clients.
Willis Towers Watson hopes you found the general information provided in this publication informative and helpful. The information contained herein is not intended to constitute legal or other professional advice and should not be relied upon in lieu of consultation with your own legal advisors. In the event you would like more information regarding your insurance coverage, please do not hesitate to reach out to us. In North America, Willis Towers Watson offers insurance products through licensed entities, including Willis Towers Watson Northeast, Inc. (in the United States) and Willis Canada Inc. (in Canada).
