Limiting Fiduciary Liability (Costs)

A recent survey of insurers highlights the criteria that a number of the nation’s leading fiduciary liability insurers identified as the biggest sources of fiduciary risk—within the control of plan fiduciaries. 

Now, arguably, the report—titled “What Drives Fiduciary Liability?”—might have been more accurately titled “What Drives Fiduciary Liability Insurance Costs?”—or even more precisely “What Drives Fiduciary Liability Insurance Costs That You Can Do Something About?” Indeed, the report’s authors note that it was specifically focused on sources of risk that are within the control of fiduciaries. That’s key, because there are things that attract litigation (such as plan size or even stock price) that aren’t. 

Moreover, the survey respondents (there were 8 of the 12 that Aon said account for 85% of the total gross written premium placed by the firms in 2020) were asked only to evaluate pricing criteria as having a significant, small or nonexistent impact—though one might want to find something between significant and small, at least.

The survey’s authors identified five key takeaways—and while there are more elements discussed in the report, that seems a good place to start:

1. Fees are very important.

Well, to quote Homer Simpson, “doh.” Indeed, the only surprises here are that (only) 88% of the respondents identified periodic fee benchmarking reviews by the investment committee as a “significant” driver of insurance premiums; (just) 75% said it was significant if the plan uses revenue-sharing or Sub-TA type revenues; and (a mere) 63% said that using retail mutual fund share classes would fall in that category. Granted, with only 8 respondents (albeit with big market share), we’re talking small numbers.

Moreover, note that these points aren’t about what the fees are, and certainly not what they are relative to the services provided (the true measure of “reasonable”), but about fee structures and process. It is, in other words, about what might be seen as the “appearance” of impropriety. Indeed, as has been borne out in litigation, there’s no legal issue with any of the foregoing—but all of these practices (or, in the case of the review, non-practices) have been challenged as if they were themselves a violation, or at least an indicator, of a fiduciary breach. 

Suffice it to say that if the plan is currently doing (or not doing, in the case of a review) these things, you should be sure to have prudently considered the reasons—and to have documented that consideration—but can likely expect to pay more in insurance premiums, regardless. 

2. Committee minutes are important, but it matters less who takes them.

Only a third of the survey respondents said that taking formal minutes was a “significant” factor (the rest said the impact was “small”—bearing in mind that the only other option was “nonexistent”), so I have a feeling that the Aon report authors exercised a little editorial “discretion” in positioning that as important. In fact, that seemed very low to me, certainly in view of the impact in persuading a judge (much less a DOL auditor) that you do, in fact, have a prudent process in place. Perhaps it reflects what still seems to be a consistent caution from the legal community: that such things can be a “smoking gun” in litigation. On the other hand, I’ve seen committee minutes be effective shields in having cases dismissed at the pleading stage, so…

The report does indicate that there is no particular advantage in having an advisor or legal counsel act as scribe, though the latter might well limit the “smoking gun” risk.

3. Investment advisors are viewed as a moderate influencer of premiums.

This one was a bit of a head-scratcher as well—perhaps reflecting the varying quality and expertise of the investment advisors whose expertise might be tapped. The Aon report said the responses were split almost evenly among the impact of an advisor being deemed as significant, small or nonexistent, and even when going on to qualify that statement (with the quality of the advisor), only a quarter (that’s two firms) said it would have a significant impact on pricing. (Half described the impact as “small.”) 

There were some qualifiers here—the impact was seen as small by one “unless related party in which case significant impact” (and I’m assuming a negative one), another stated that an “experienced advisor is expected,” and still another cautioned that while this was a factor, “…outside vendors are not foolproof and the insured retains fiduciary liability with respect to them.” 

4. Employer stock in DC plans remains a top concern for insurers.

This one appears to matter—a lot. Then again, it wasn’t unanimous—88% rated it as a significant factor, though that figure dropped to 50% when there is a limit on the size of the investment, which is increasingly common. Indeed, so-called “stock drop” suits seem to (still) crop up every time there is a disappointing earnings announcement or some piece of bad PR that drives down the stock price. 

That said, it’s one thing to bring suit—and yet, it remains a hard suit to win based on recent case history. 

Not mentioned: the inclusion of proprietary funds. It’s seldom a standalone rationale for bringing suit, but—well, it’s increasingly common, at least among organizations that have that capability.

5. Environmental, social and governance (ESG) options in DC plans play a minor role in pricing fiduciary liability insurance.

The inclusion of this particular item was a bit of a head-scratcher, though the results—62% said it had no impact on the premium pricing—were not. In fairness, and as noted by the survey’s authors, the survey was fielded after the Biden administration’s announcement that it was not going to enforce the rule put in place by the Trump administration, but my guess (and theirs) is that it simply reflects the relatively small take-up rate by plans and the tepid adoption by participants. Indeed, one of the survey respondents commented that the impact “depends on the % of plan assets or # of investment options offered. As well as if the plan were to attempt to force a requirement to its participants.” 

Ultimately, and as one of the survey respondents noted, “While we look at a number of items that are in the survey, the problem is that there is pressure to settle, in some cases because the cost to defend would be greater than the settlement value. Defense costs and settlement amounts in the so-called fee cases are incredibly high, even where the client has robust fiduciary processes.”

Still, forewarned is forearmed. Like vaccines, addressing those issues might not completely forestall litigation—but it would surely make for a less painful set of “symptoms.”

- Nevin E. Adams, JD

Not-So-Quiet Period

Remember when it used to be quiet in July?

Not so this past week, with the announcement of two major retirement industry acquisitions, a significant update on fee disclosure regulations, and a ruling in a revenue-sharing case that could have far-reaching implications.

On the two industry acquisitions, LPL’s absorption of National Retirement Partners (NRP) will surely be of most interest to the adviser community (see LPL Acquiring National Retirement Partners). LPL, which had only recently launched an IPO (and is thus literally in a “quiet period”), has struggled for some time with its retirement plan focus, while NRP has had its own share of issues in the wake of the recent financial crisis. LPL’s backing should certainly prove to be restorative for NRP’s positioning, and it’s hard to imagine that a newly constituted retirement-focused unit at LPL under Bill Chetney’s leadership won’t provide a clarity of focus for LPL’s efforts in this space.

Plan sponsors may feel a greater immediate impact from Aon’s acquisition of Hewitt (see Hewitt to Merge with Aon), the rationale is that the former’s middle-market product set (especially its insurance lines) will find room to grow in Hewitt’s predominantly large-client base, while Hewitt’s large-plan expertise will be able to find new applications in Aon’s target markets. Those notions inevitably look logical on paper; time will tell if the firms’ cultures and client approaches will assimilate. That said, the new partners are projecting a LOT of cost savings alongside a $5 billion merger—and in a people-intensive business.

As for the final release of the 408(b)(2) fee disclosure regulations, the wait appears to have been worth it (see DoL Issues New Fee Disclosure Rules). I am admittedly not yet all the way through a careful reading of the interim final package, but the removal of a written-contract requirement surely meets the common sense test, while retaining the impact of written disclosures. Similarly, the approach on disclosure—a reliance on full disclosure rather than the, to my eye, more limited conflict-of-interest focus of the prior regulations, should provide plan fiduciaries with more information, even if it does bring with it a potentially greater effort in sifting for those conflicts. Finally—and this is the provision almost certainly likely to draw the most industry focus—the DoL has opted to require that “certain providers of multiple services” disclose separately recordkeeping costs.

This was one of the more controversial provisions in the earlier proposals, and the Labor Department at that time tried to craft a “Solomonic” yet practical solution for those bundled providers who continue to claim that they are simply unable to break those costs out of their integrated delivery models, by basically requiring that unbundled providers disclose those costs, while those who couldn’t (or said they couldn’t) needn’t.

I am encouraged that this new proposal does not make that differentiation. In response to my question on the issue last week, Assistant Secretary of Labor Phyllis Borzi noted that they had heard from a number of sources during the course of the process and comment periods that many plan sponsors still are under the impression that recordkeeping is “free,” and they felt it was necessary to help disavow them of that notion. Back in the day when recordkeeping was routinely priced as a discrete service, it generally was found to constitute about 20% of the total costs for a DC plan; so, IMHO, it’s certainly large enough to warrant a separate disclosure. Ms. Borzi noted that those who may (still) find it difficult to comply with the measure have a year to do so. Personally, I would argue that they should have seen it coming before now.

As for that revenue-sharing case, well, we’ll take a look at it next week—unless, of course, we have another not-so-quiet week.