Why Small Law Firms are Especially Vulnerable to Excessive Fee Lawsuits

Since I began focusing on employer-sponsored retirement plans about 14 years ago, I have closely followed the litigation landscape. Most of the lawsuits I read about dealt with very large organizations with over $1 billion in assets who were passing on excessive investment management, administration, and record keeping fees to their employees. While these lawsuits have served to protect participants from excessive fees, they never amounted to much per participant because fees in these large plans have always been minimal. Participants in smaller plans, in contrast, pay far greater fees, especially advisory fees, but they haven’t had an opportunity to seek recovery because their plans were too small to attract the attention of litigation firms or the Department of Labor.

However, according to Chubb, one of the leading carriers of fiduciary liability insurance protection, the landscape is changing.

”Although fiduciary excessive fee claims first appeared in 2006, they were historically infrequent, other than a brief period in 2016 when a series of claims were brought against certain private universities. However, in 2020, the pace of filings dramatically increased. These new filings do not exhibit a discernable trend in the types of plan sponsors or industries that plaintiffs might seek to serve with a complaint.

It’s not just large plans getting sued anymore.

Prior to 2016, the vast majority of plans whose fiduciaries were being sued had well over $1 billion in plan assets. Since then, companies with much smaller plans have increasingly been targeted. In fact, in one year, well over half of the targeted plans contained less than $1 billion in plan assets.

Over the past three years, 46% of plans that were sued had less than $1 billion in plan assets, while in 2016, just under 6% of the plans that were sued had less than $1 billion in plan assets. Even plans with less than $50 million in plan assets have been sued!”

While the small plans whose participants are paying excessive fees aren’t necessarily law firms, these types of firms are more likely to do so because they tend to make larger contributions both at the employer and employee level which drives up the fees that are typically asset-based. Other professional service firms like medical practices, architecture, and engineering firms have the same issue, but law firm are especially prone to hire advisory firms that bring them business and/or friends or family members, resulting in a lack of scrutiny being paid to service provider compensation. In fact, of the nearly 1,000 examples of companies paying excessive fees I have uncovered in my 14 years of research, more than 10% of them are law firms - more than any other profession.