Legal Tech Cracking the Code on ERISA Excessive Fee Violations
30/01/2024
Countless hardworking Americans diligently save into their pensions for their futures every day. Yet they risk losing thousands due to poor fiduciary management of their pension plans. These savings come from honest, hard work and they deserve fair treatment and preservation.
Enacted in 1974, the Employee Retirement Income Security Act (ERISA) has stood as a safeguard for employees’ retirement benefits for decades. Its goal: to protect the interests of participants and beneficiaries in employee benefit pension plans. American citizens work hard their entire adult lives to live a good life and save for their retirement. Pension plans and their fiduciaries have a legal duty to protect these hard earned savings – and definitely not to exploit them.
Most retirement plan documents and rules are complex and nuanced; thus, even when the data is transparent, the average plan participant (i.e., employee or retiree) can’t always protect their rights since they lack the tools or knowledge to detect when a violation occurs at their expense.
ERISA and excessive fees
Fiduciaries, in the context of ERISA, are individuals or entities that have specific responsibilities and duties regarding the management and administration of pension plans. They must adhere to a high standard of care, prudence, and loyalty in managing the plan’s assets and making decisions that affect plan participants. Typical plan fiduciaries include plan administrators – who run the day to day of the plan, investment managers who make the investment decisions of the plan, and trustees – who maintain legal authority over the plan.
Under ERISA these fiduciaries are legally obligated to act in the best interests of the plan participants and beneficiaries. In practice, this means making sound investment decisions, striking the right balance of risk vs return as specified by the plan, and ensuring that the fees paid by the plan to maintain its administration and recordkeeping are reasonable. A common breach of fiduciary duty under ERISA involves the breach of duty of prudence or loyalty. This is when a plan’s fiduciaries fail to monitor service providers, allowing excessive fees to be charged to the plan, as well as poor investment decisions, resulting in a loss of the plan’s assets and diminished retirement savings for its participants.
There has been a recent trend in excessive fee class action lawsuits against plan fiduciaries. For example in 2022, Costco agreed to pay $5.1 Million to settle an ERISA case alleging fiduciaries did not adequately review the cost of fees. It has frequently been argued in court that charging $25-$35 per participant for the administration of a pension plan is considered reasonable, and thus charging above this amount could be considered excessive fees.
In Darrow’s ongoing quest to build a frictionless justice system, we leveraged our cutting-edge, AI-driven technology to sift through mountains of legal data and analyze ERISA filings over the past two years. From this data, we have been able to glean some valuable insights, quickly revealing that excessive fees are the most common complaint within ERISA class action lawsuits.
$5 today could be worth of $1K in 40 years
Excessive fees for pension plans are not only illegal but represent a profound ethical concern, as they undermine the very essence of retirement savings – a crucial aspect of an individual’s financial security. Americans dedicate the entirety of their working lives to contribute to these pension plans, trusting that these investments will provide a comfortable retirement. While what is considered to be excessive fees under ERISA might appear inconspicuous initially, their impact over the decades of savings can be substantial, transforming what seems like a modest deduction into a significant portion of the overall retirement fund.
For example, If a pension plan is paying $50 per participant in management fees – that’s $15 above what courts consider to be reasonable. Take that $15, and assume a 10% annual return on investment. Over the course of 35 years, that excess $15 per participant being paid in fees, will be worth $421. Over the course of 40 years it will be worth $678. Now imagine that each participant is paying $15 excess every year for 10 years. The exponential growth of investments relies heavily on minimizing extraneous costs, and high fees erode the potential returns that individuals could otherwise enjoy. This results in a diminished retirement fund, jeopardizing the financial well-being of retirees who have diligently contributed to their pension plans throughout their careers, carefully planning for their retirement.
Leveraging technology to find ERISA violations
At Darrow, we utilized our AI-driven technology to analyze government databases and public disclosures on pension plans, including 401(k) plans – a type of pension plan offered by American employers. We looked at information about plans’ financial conditions, qualifications, and operation status, by downloading and reviewing data. Given the sheer volume of data held about pension plans, and the dense, finance-related subject matter, it would take a huge amount of time as well as require a deep understanding of ERISA for a lawyer, to conduct a thorough analysis and extract relevant data without the help of technology.
Darrow’s legal data team (comprising legal and intelligence experts) compiled this information into layered spreadsheets, and conducted extensive analysis of the contents. Based on our analysis, the team developed a tool for quickly identifying anomalies, indicating plans that pay excessive fees to their recordkeepers. We did so by developing a filtering table and dashboard for each plan that facilitated the detection of abnormalities in an intuitive and accessible manner. By combining every plan’s data from the past several years, we prioritized leads with the potential for the largest and most egregious damages. This approach allowed us to identify dozens of highly probable violations and compare recordkeeping and other fees paid by plans of a similar size, highlighting the administrators’ imprudence. Furthermore, to emphasize the severity of the violations, we compare the amount the specific recordkeeper usually charges for plans of a similar size.
This is just the beginning
The utilization of AI driven technology to uncover excessive fee ERISA violations is a step towards the vision we hold at Darrow for frictionless justice. Millions of Americans work hard, day-in day-out, to save for their futures and they do not deserve to lose any savings that could be worth thousands because they are paying too much for the management of their pension plans.
The journey has just begun, and the intersection of technology and regulatory compliance holds boundless possibilities for enhancing transparency, accountability, and overall adherence to ERISA standards.