Peer Intelligence - Winter 2024

One path plan sponsors take to reduce litigation risk in their U.S. DC plans

By Chris Flynn

In this edition, we take a look at one of the long-term trends in our U.S. defined contribution database: an increase in plan sponsors who cover plan recordkeeping fees, previously paid for by the participants.

A variety of factors combine to represent the generosity of a defined contribution pension plan, including fixed contribution levels, match rates and maximums, or costs being paid for by the plan sponsor. While a variety of plan designs could be viewed as equally generous from the standpoint of the sponsor, some decisions may leave the plan sponsor less exposed to lawsuits. Our belief is that this is one driver of a long-term trend we see in our database: a growing minority of U.S. corporate plan sponsors paying for all, or nearly all, recordkeeping fees.

Ten years ago, corporate plans in our database were somewhat less likely to pay for recordkeeping expenses than non-corporate plans. Looking at only those plan sponsors with ten years of uninterrupted reporting to CEM, over twice as many corporate sponsors now cover recordkeeping fees, while there has been no change among non-corporate plans. The gap has been eliminated, and we would not be surprised if, in the future, we see corporate plans become significantly more likely than non-corporate plans to cover recordkeeping expenses.

While we do not survey sponsors as to why they have changed plan features, anecdotes suggest eliminating one avenue for lawsuits is a common reason why a corporate plan sponsor, in particular, might opt to begin covering recordkeeping expenses. Data collected by lawsuit watchers in the industry shows that it is a common avenue: for instance, this summary of 2023 lawsuits found excess recordkeeping fees to be the most common complaint in lawsuits, outpacing allegations of excess investment fees or alleged underperformance of plan options. It might not be surprising for some corporate sponsors (who are the ones typically subject to lawsuits) to conclude that covering recordkeeping fees, which essentially removes this avenue for lawsuits, could be an attractive benefit to provide their employees.

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