As the previously limited market for primary fiduciary shows some signs of expansion, we expect soon to see more flat renewals.
Financial, Executive and Professional Risks (FINEX)
Rate predictions: Fiduciary liability
Small public/nonprofit (defined contribution pension plan assets up to $50M)
Flat to +10%
Mid-sized public/nonprofit (plans asset $50M to $500M)
+5% to +25%
Large public/nonprofit (plan assets above $500M)
+10% to +40%
+5% to +25%
Underwriters continue to be wary of fiduciary risks, but there has been some stabilization.
Underwriting focus: Excessive fee class action volume appears to have returned somewhat, with 42 cases being filed in the first half of 2022 (versus only 54 in all of 2021, but almost 100 in 2020). Although many recent settlements have been substantially below $5 million (previously most settlements exceeded $10 million), carriers are still concerned about perceived unpredictability, high costs of defense and the substantial number of still pending cases. The U.S. Supreme Court’s pro-plaintiff ruling in the Northwestern University excessive fee case disappointed insureds who hoped that a victory for the defense could reverse the negative pricing trends in fiduciary liability; although the Court’s holding was very narrow, many carriers have tried to use it as a justification for continued tough terms and threatened escalation. However, recent positive precedents in the Sixth and Seventh Circuits (discussed below), plus more interested markets, have started to counteract the effects of the Northwestern decision and contribute to smaller premium increases which may be heading toward flat renewals.
Particularly with commercial and large nonprofit (university and hospital) risks, underwriters are focused on defined contribution pension plans with assets greater than $250 million, where previously the cut-off had been $1 billion (some carriers don’t want to quote plans with assets above $1 billion).
Even smaller plans cause concern, now that a few smaller plaintiff firms have targeted them. Insurers now seek detailed information about fund fees, record keeping costs, investment performance, share class, vendor vetting process and plan governance, causing some insureds to seek assistance from their vendors in filling out applications.
A wave of class actions filed by one law firm against sponsors whose 401k plans include BlackRock target date funds has caused some 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.
Retentions/sub-limits: Insurers are even more focused on retentions than on premiums. First-dollar coverage has become almost impossible to obtain. Increased retentions of seven figures remain commonplace for specific exposures, e.g., prohibited transactions/excessive fees and sometimes all mass/class actions, with at least one carrier insisting on eight-figure retentions. Carriers are attempting to push retentions even higher, but insureds who already have seven-figure retentions have generally been successful in resisting increases. Even the non-class action retentions are generally six figures now (previously five figures). Some insurers may only offer a sub-limit of liability or exclude entirely prohibited transactions/excessive fees coverage. Marketplace results will vary with plan asset size, plan governance and claim history, but it is a challenge to get credit for positive risk factors.
Coverage breadth remains steady: Other than increasing retentions, carriers have not generally been restricting coverage. It should be noted, however, that terms can vary substantially. Many carriers are still receptive to offering coverage enhancing endorsements.
Blended coverage: Many organizations, including financial institutions and private/non-profit companies, continue to buy fiduciary liability coverage as part of a package policy, which in some cases has softened the marketplace challenges.
Is some relief in sight? While some carriers have all but left the market, and others have expressed little interest in writing new business, some traditional financial line markets that have not historically written much fiduciary risk have begun to provide alternatives (particularly if there are related primary D&O opportunities). Most carriers are closely monitoring the capacity they are putting out, and $5 million primary limits are now more common than $10 million.
Rate prediction qualification: Rate increases may be higher or lower depending on the insured’s existing pricing. Insureds who have already had at least one round of double-digit percentage premium increases may be able to keep increases to a range of +5% to +15%. Soon, we expect to see flat renewals becoming more common. Price per million of coverage can vary substantially among risk classifications, notably those involving plans with proprietary funds.
Many accounts are still viewed by carriers as challenged, particularly in certain industries.
Challenged classes include financial institutions with proprietary funds in their plans, whether currently or in the past, especially if they have not yet been the subject of a prohibited transaction claim. However, financial institutions without proprietary funds in their plans and/or who accept relevant exclusions and/or already have elevated premiums are seeing smaller increases.
In the nonprofit space, large universities and hospitals have seen some of the most substantial premium and retention increases and have struggled to find placement. This was the result of a wave of excessive fee cases in this sector in recent years. However, the lull in university suits has been helpful in that sector, while hospital systems remain severely challenged.
Underwriters continue to focus on such issues 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. Some carriers are nervous about potential insureds who have recently improved their processes but might be attractive targets for plaintiff firms who would make allegations about the prior period.
Virtually any organization may be treated as risky by some carriers, and it can be challenging to get credit for best practices.
Broader economic challenges may be increasing risks.
Underwriters have focused on defined contribution plan risks and have not paid as much attention to other types of plans, especially health and welfare plans. However, this could change if economic uncertainties accelerate these risks.
Cutbacks in benefits (particularly retiree medical benefits) and/or workforces may lead to claims and potentially large class actions.
Entities that still sponsor defined benefit pension plans and saw their funding status improve substantially during 2021, have more recently seen declines in funding levels.
Litigation volume in first half of 2022 approaches 2020 high after a drop in 2021; legislative and regulatory changes create uncertainty.
In 2021, excessive fee claim frequency dropped significantly from its 2020 highs: For over a decade, a growing number of plaintiff firms have been suing diverse public, private and non-profit entities, making allegations involving allegedly excessive investment and/or recordkeeping fees that resulted in reduced investment principle and reduced returns; many of these class actions also alleged sustained periods of underperformance by specific investment options. Excessive fee class action frequency rose again in 2022 after dropping about 40% in 2021 from 2020 highs (42 cases filed in the first half of 2022), with more than 100 cases ongoing. Several recent excessive fee settlements have been modest (between $1 million and $5 million, mostly on the lower end) than previously. Since the U.S. Supreme Court’s pro-plaintiff Northwestern decision, few excessive fee cases have been dismissed, but recent positive precedent from the Sixth and Seventh Circuits (CommonSpirit Health and Oshkosh respectively, discussed below) may show some pro-defense momentum.
Other types of class actions persist: Suits against defined benefit plans alleging reduced benefits due to the use of outdated mortality table assumptions continue to be litigated, as well as class actions involving COBRA notice deficiencies or improper benefit reductions.
Employer stock class actions against public companies remain virtually nonexistent, but private companies ESOPs can still see claims: In the continuing aftermath of the U.S. Supreme Court’s decision in Fifth ThirdBank v. Dudenhoeffer, very few employer stock drop class actions have been filed, and those few continue to be dismissed and affirmed on appeal. Nonetheless, carriers remain concerned about employer stock in plans; they will often exclude employer stock ownership plans or include elevated retentions. Meanwhile, class actions against private companies with employer stock plans, mostly arising from valuation issues in connection with establishing or shutting down such plans, continue to be filed occasionally and are seldom dismissed on early motion.
Risks post the Dobbs decision: Following the U.S. Supreme Court decision in Dobbs v. Jackson Women’s Health Organization, overturning Roe v. Wade, some companies are implementing protocols to assist employees in gaining access to healthcare services they may not be able to obtain in their own states. Fiduciary risks can arise as to possible violations of newly implemented state laws and related civil and criminal investigations and proceedings, raising questions concerning the scope of ERISA preemption. Some employee participants might complain about benefit cutbacks, while others might complain about discrimination. Plan sponsors may also face challenges complying with ERISA’s technical requirements in connection with plan changes and creation.
The U.S. Department of Labor may now bring more previously time-barred cases: The DOL achieved a decision that it is generally entitled to the longer six-year statute of limitations (as opposed to the three-year limitation period which is triggered by “actual knowledge” of a violation of ERISA) in which to bring a claim, even if information from which a breach could have been detected was included in a Form 5500 that was filed with the DOL. The court did, however, caution that the DOL could not rely on the longer statute of limitations if it was “willfully blind.” Walsh v. Bowers, 2021 WL 4240365 (D.C.Hawaii, Sept. 17, 2021).
The Department of Labor has launched several plan cyber audits: In April 2021, the DOL issued guidance providing tips and best practices to help retirement plan sponsors and fiduciaries better manage cybersecurity risks. Not long after, the DOL initiated many audits regarding retirement plan cybersecurity practices and has continued to do so.
IRS giving 90-day warning on audits: On June 3, the Internal Revenue Service announced a new pilot program for retirement plans to promote compliance while reducing audit costs. Under the Pre-Examination Compliance Pilot, the IRS is notifying retirement plan sponsors 90 days in advance that their plan has been selected for an audit. The plan sponsor then has 90 days to review its plan documents and operations, and to correct any compliance issues that may be discovered. This new procedure offers a potentially substantial advantage to plan sponsors, since voluntary compliance program (VCP) fees are lower than the audit cap fees that apply to errors found during IRS audits. Previously the VCP program was not available to sponsors who had been identified for audit.
Most fiduciary liability policies provide coverage in relation to VCPs, usually without application of a retention.
ESG rules and risks
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.”
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.
Pooled employer plans (SECURE Act): 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 allows employers to join and delegate both investment and plan administration fiduciary obligations to pooled plan providers (PPPs). PEPs and PPPs need to ensure that they have sufficient and appropriately tailored fiduciary liability insurance to address emerging exposures contemplated in PPP/PEP arrangements. A slowly increasing number of small employers are joining PEPs.
SECURE ACT 2.0: After review by relevant committees, the Senate now has the framework for its version of Securing A Strong Retirement Act (SECURE 2.0). A version of SECURE 2.0 passed in the U.S. House of Representatives on March 29, 2022, by an overwhelming bipartisan 414 to 5 margin. If passed by the Senate in its current form, the bill would expand automatic enrollment in defined contribution plans by requiring new 401(k), 403(b) and SIMPLE plans to automatically enroll participants upon becoming eligible, with the ability for employees to opt out of coverage.
Among other things, SECURE 2.0 also enhances the retirement plan start-up credit, making it easier for small businesses to sponsor a retirement plan. The legislation further increases the required minimum distribution age to 75 and indexes the catch-up contribution limit for individual retirement accounts. The legislation also allows employers to match employee student loan repayments with retirement account contributions. It is also likely that non-profit 403(b) plans will soon be allowed to offer collective investment trusts (CITs), which often have lower fee structures than mutual funds, as options.
It is expected that the House and Senate versions will be reconciled into final legislation during the coming months. Whenever the final bill is passed, fiduciaries are going to have to educate themselves about the new playing field and facilitate passing on the benefits to their plan participants. Plaintiff class action lawyers will be prepared to second guess plan fiduciaries.
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.”
U.S. Supreme Court decides Northwestern University excessive fee case for plaintiffs.
On January 24 the U.S. Supreme Court issued its eagerly awaited decision in the Northwestern University excessive fee case, finding for the plaintiffs and remanding the case back to the Seventh Circuit.
The Seventh Circuit had affirmed a holding that dismissed the case, which arose from the offering of allegedly imprudent investment options, solely because plaintiffs were offered other indisputably prudent investment choices. The Supreme Court’s decision rejected the Seventh Circuit’s uniquely extreme position on the “investment choice” defense.
Unfortunately, the decision did not provide meaningful additional guidance concerning what constitutes sufficient specificity to establish a plausible pleading other than cautioning future courts 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.”
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 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. Also, within the Sixth and Seventh Circuits there have been submissions of supplemental authority and motions for reconsideration filed by defendants whose motions to dismiss were previously denied. For more detail, see CommonSpirit Health and Oshkosh.
Buyers should keep on an eye on key loss drivers.
Excessive fees: As discussed above, excessive fee claim frequency rose in the first half of 2022 after having dropped about 40% in 2021 from 2020 highs (44 cases filed in the first half of 2022), with more than 100 cases ongoing.
Financial institutions: Excessive fee claims against financial institutions often include allegations that plan participants were disadvantaged due to conflicts of interest that influenced the plan sponsor to include its own overpriced investment options in the plan; such claims tend to settle for substantially more than class actions without such alleged conflicts of interest.
Any sized plan can be a target: Although the first excessive fee cases seemed to focus on specific industries and plans whose assets exceeded $1 billion, in recent years the perception is that no plan is safe. Various public, private, multiple employer and nonprofit entities have been sued, and even plans with assets below $100 million have been targeted (although suits against plans with assets below $1 billion have not resulted in any eight-figure settlements).
M&A: Carriers may apply increased scrutiny to insured with substantial merger and acquisition and/or spin-off activities, which can lead to changes in benefits and related complaints.
Positive risk factors: It can be difficult to get credit from carriers for positive risk factors, but the effort can yield results. Among the factors to emphasize are the quality of advisors and degree of delegation, as well as favorable venues.
No claim yet? Not so fast: Organizations that have not been the subject of claim activity may not necessarily be viewed as a better risk. Particularly for financial institutions with proprietary funds in their plans, currently or historically; insurers may assume that a proprietary fund-related claim is likely at some point. In general, carriers are aware of ERISA’s long statute of limitations (six years) and are therefore more concerned with past practices than they might be in connection with other policies.
Limit adequacy: As fiduciary rates rose; some insureds may have cut the size of their towers. As rates come back down, insureds might consider increasing their limits, notwithstanding that many recent settlements have been in the low seven figures.
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).