20 years of excessive fee litigation: Lessons for plan sponsors and fiduciaries

Key takeaways

1. Excessive fee litigation began as a novel legal theory against large retirement plans and has evolved into a durable litigation trend that affects companies big and small, as well as universities and nonprofits.

2. While excessive fee claims continue, plaintiffs’ lawyers also target health and welfare programs.

3. For plan sponsors, being prepared to address the proactive oversight of fees, investments, and service providers has become a major component of the fiduciary liability underwriting process.

Around 2005, a plaintiffs’ law firm fielded various questions from clients about 401(k) retirement savings plans.

One area of inquiry stood out among the others: What are these fees for investments and recordkeeping? How do they affect the amount of savings over several years? What if they’re too high?

The firm explored the 401(k) landscape and found that no one had scrutinized or tested the appropriateness of administrative and investment fees in court.

Perhaps the reason was the novel and challenging nature of the claims. Lawsuits against large companies would be protracted, complicated, and resource-intensive for a plaintiffs’ firm that often takes cases on a contingency fee basis.

Still, sensing an opportunity, the firm decided to pursue litigation on the theory that retirement plan participants and beneficiaries paid excessive fees. If they could show that other plans charged lower fees or achieved better investment outcomes with lower-fee vehicles, they may find success.

A big bet in 2006

So the firm took a gamble.

On Sept. 11, 2006, it filed several lawsuits accusing large companies of charging excessive administrative and investment fees under their 401(k) plans, in violation of the Employee Retirement Income Security Act (ERISA).

The bet did not pay off at first. Plan sponsors argued strenuously against plaintiffs’ claims, and judges tended to kick out their lawsuits on a motion to dismiss, often at the earliest critical stage of litigation.

The cases also dragged on and could take years to litigate.

One such case was a lawsuit against a health insurance company filed in 2007. That case resulted in a $35 million settlement in 2013. It served as an example of both the magnitude of the remuneration that plaintiffs could obtain and the liability that fiduciaries and plan sponsors could face.

Others would follow, such as a $62 million settlement with a defense contractor in 2015, which was one of the first lawsuits filed in 2006 and took nearly a decade to litigate.

Then two things happened. One, in August 2016, plaintiffs started targeting universities, whose 403(b) plans are similar to 401(k) plans, as well as smaller companies. And two, other plaintiffs’ law firms took note of the initial excessive fee strategies. They copied them, casting a wider net of claims across the business world, including nonprofits.

More than 600 excessive-fee lawsuits have been filed over the last 10 years, including 94 in 2025, the second-highest number in a single year.

The evolving nature of claims

For almost 20 years, excessive fee lawsuits focused solely on retirement savings plans and tested a novel yet straightforward set of allegations. ERISA requires fiduciaries of employer-sponsored retirement plans to act solely in the interest of participants and to manage the plan with the skill and diligence of a prudent person. Plan sponsors typically have investment managers and plan administrators who charge fees to make investment decisions and handle recordkeeping.

Plaintiffs argue that the difference between fees can cost future retirees thousands of dollars or more. So, plaintiffs look at a plan’s fees, expressed as a percentage of the plan’s assets, and claim they are excessive if they can find other plans that charge less. If a plan’s investments underperform another plan that commands a lower fee, that becomes a ripe target for an excessive fee case.

Important developments that have led to more cases

A key inflection point in excessive fee litigation occurred in 2015 when the U.S. Supreme Court took up a case called Tibble v. Edison International. Plaintiffs in that case argued that Edison’s retirement plan managers relied on mutual funds that charged higher fees, when they could have explored other investment vehicles that would have delivered the same outcome but charged lower fees.

Justices ruled in a unanimous decision that fiduciaries have a continuing and ongoing duty to look over their investments and remove imprudent ones, and that plaintiffs must bring claims within six years of an allegedly imprudent decision.

The Tibble decision invited more excessive fee cases.

Another turning point in the evolution of excessive fee claims occurred in recent years when plaintiffs began to scrutinize health and welfare plans, in addition to retirement plans.

Lawsuits against health and welfare plans generally allege that companies violated ERISA by managing self-funded health plans in a way that caused participants to overpay for their health benefits.

A particular nexus of claims is fiduciary oversight of pharmacy benefits. Recent lawsuits allege that companies’ choice of pharmacy benefit managers — intermediaries that manage prescription benefits for employers — caused participants to pay higher fees and drug prices.

How excessive fee cases affect fiduciary liability insurance

Plan sponsors face a number of risks when overseeing employer-sponsored retirement and healthcare plans. They deal with Department of Labor regulations and audit requirements. They make challenging decisions to ensure their investments keep pace with the market and deliver the best possible results to plan participants.

Excessive fee risk is notable due to the potential for protracted litigation and large settlements, which are both distracting and financially challenging for companies. And like a guest who has not only overstayed their welcome but was never invited, excessive fee claims don’t show any signs of leaving.

These cases can be amplified by social inflation, the concept of insurance claims and litigation costs increasing faster than broader economic inflation. Social inflation is brought on by shifting societal views that lead to increased skepticism toward corporations and their profit motives. In the context of excessive-fee litigation, a plan sponsor might be leery of defending such claims before a jury.

Third-party litigation funding can also help plaintiffs’ law firms more easily cover the costs of pursuing class action lawsuits, which can lead to higher settlement costs.

Larger companies can absorb these settlements and afford fiduciary liability insurance on terms that can more easily mitigate their effects on balance sheets. Smaller companies and nonprofits, increasingly targets of excessive fee claims, could have a more difficult time managing legal and insurance costs.

Fiduciary liability insurance typically responds to excessive fee claims, including the cost of defending a lawsuit. A policyholder, however, usually has to pay a higher deductible or self-insured retention before insurance coverage for an excessive fee claim begins.

While more garden-variety fiduciary liability matters may involve smaller deductibles in the $10,000 range, retentions for excessive fee claims often reach into the $250,000 to $500,000 range. It’s not unusual for retentions to exceed $1 million.

In response to the risk of excessive fee claims, insurance carriers continue to ask their policyholders more detailed questions about how they benchmark and evaluate their plan’s recordkeeping and administration fees. Depending on their insureds' answers, carriers may increase retentions or impose other restrictions on coverage for excessive fee claims.

Recommendations

Excessive-fee lawsuits are pervasive enough that plan sponsors should not wonder whether they will be sued, but rather when they will be sued. Companies with strong fiduciary governance plans are best positioned to defend against claims that they charged impermissibly high fees. These companies typically:

• Form benefits committees that meet regularly and meticulously document their decision-making.

• Regularly issue requests for proposals to recordkeepers to ensure plan sponsors frequently revisit service providers and test the market for competitive options.

• Use independent benchmarks to judge their plans’ recordkeeping fees.

• Negotiate proposed recordkeeping fees rather than accepting quoted fees.

• Adopt and follow policies for regular reviews of plan investments and expenses.

• Develop plans and policies for spotting and consistently exiting underperforming investment positions.

• Evaluate the risks and benefits of different investment vehicles and share classes that may charge lower fees.

• Ensure investment portfolios are diversified by type, risk, and allocation, and document decisions to use more expensive investment types and vehicles, like active management or mutual funds.

Two decades after the first excessive-fee lawsuits were filed, the litigation environment continues to evolve while showing no signs of slowing. Similarly, the fiduciary liability insurance landscape consistently reflects carriers’ concerns about and scrutiny of excessive-fee risk. There are no signs of this abating. For plan sponsors, proactive oversight of fees, investments, and service providers is no longer simply a best practice — it’s an essential component of litigation preparedness and fiduciary liability risk management.

For more information:

• Visit our fiduciary liability insurance page here (opens a new window).

• Visit our People Solutions page here (opens a new window).

• Contact a member of your Lockton team.