This is a great and well-illustrated presentation by Chubb on the history of excessive fee litigation against sponsors of defined contribution retirement plans, on the pace of filings, on the types and sizes of plans that are being sued and on settlements of those claims. What you can see in the data is something that those of us writing on this topic years ago predicted – that the number of filings would only increase over time and that, perhaps most importantly, the size of plans targeted by plaintiffs’ lawyers would decrease, making being sued on a fee claim a potential risk for many employers who might have otherwise thought, a few years ago, that they were too small to be at risk. In a way, what has happened is sort of the opposite of the “too big to fail” mentality in financial industry regulation. For many years, plan sponsors without billion dollar plans assumed they were “too small to sue,” but as the Chubb presentation makes clear, that turned out to be wishful thinking.
The graphic presents the idea that litigation costs, defense costs, settlements and the like for these types of claims are simply going up, up and away, with no obvious end in sight, nor with any obvious rhyme or reason that would bring some certainty to this area of litigation or to predicting the potential exposures of plan sponsors. This is in many ways the point made by Dan Aronowitz in, among other blog posts, his piece on jury trials in excessive fee cases, when he points out the vagaries of rulings in this area of the law, and the lack of consistency in case outcomes.
To me, the underlying dynamic is that more and more plaintiffs’ firms have moved into this area as settlement values have gone up, and more and more cases, against smaller and smaller plans, have been filed as a result. In a way, from the perspective of an insurer, it’s a form of a death spiral, as more and more plaintiffs’ lawyers entering the area lead to more and more suits being filed, and more suits being filed leads to more and more defense costs being incurred, leading to more and more settlements being paid so as to avoid large defense bills, which in turn leads to yet more suits being filed as plaintiffs’ lawyers see those settlement numbers and decide to chase those types of settlements, thus bringing you right back to the first step in the cycle.
This is not, by the way, to suggest that all such claims are meritless, as thirty years of experience has taught me that, in fact, there are excessive expenses and fees buried in at least some plans, a point I made in my post about the inherent tax imposed on retirement savings in this country. However, years of litigation and corresponding improvements in practices by plan sponsors has substantially reduced this problem. Moreover, the fact that some claims have merit doesn’t mean that all do, or that some of them shouldn’t be filed at all and are effectively attempts to trigger settlements and legal fees to plaintiffs’ lawyers.
Is there a solution to this dynamic? Yes, there is, but it will cost insurers and plan sponsors defense dollars in the short term, and I am stealing it from the approach taken for many years by a major medical malpractice carrier in Massachusetts: don’t settle and instead try all cases to conclusion (assuming no resolution at the motion stage). Once it has been clearly established that plan sponsors and their insurers will try every one of these cases to a conclusion, you will quickly see the number of plaintiffs’ lawyers in this area shrink, the number of suits filed likewise shrink, the targeting of smaller plans end, and the merits of the claims that are brought dramatically increase. It will take awhile and, during that time period, require accepting a substantial increase in defense costs across the industry, but in the long run, it will reduce the number of suits, the amount of defense costs incurred and the amounts paid out in settlement, once the dynamic driving the increase in litigation in this area has been disrupted.