Could be. Even as the ERISA Industry Committee (ERIC) urges curtailment of the frivolous litigation disrupting plan sponsors across the country, hungry AI enthusiasts are offering to provide plaintiff attorneys with potential new cases, using plan data which can now be more quickly and deeply mined than ever.
Mining for Anomalies: Fees
Last year, settlements to resolve alleged ERISA violations reached record highs, and the claims brought on behalf of plan participants primarily related to fees and investment performance. The harsh reality for plan sponsors is that even when nothing has been done wrong, settlement frequently turns out to be less painful than the cost and disruption of mounting and sustaining defense under the exceptionally high standards of ERISA. Settling ERISA allegations is taking a toll on both big and small businesses: though the average settlement in 2023 was $8.4 million, settlements in the $200,000 range are leaving deep scars on small businesses.
While the ERISA Industry Committee works to staunch the flow of copycat cases and frivolous allegations, new opportunities to allege fiduciary failure are being rapidly brought forward, with the use of AI. Consider, for example, this information published on the website of Darrow AI:
We utilized our AI-driven technology to analyze government databases and public disclosures on pension plans, including 401(k) plans….We looked at information about plans’ financial conditions, qualifications, and operation status….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.
Defense Ready?
To mine and analyze data, Darrow AI seems to have made the assumption that pension plan administration fees above $25-$35 per participant “could be considered excessive.” However, David Levine, a principal and ERISA defense attorney with the Groom Law Group reminds plan sponsors that “There is absolutely nothing in ERISA that says the reasonable range is $25-$35,” and points out that this assumption about fees “disregards level of services, level of support, call center times, a myriad of factors,” that could justify higher fees. These services and their providers are “not interchangeable widgets.”
Since most of the data available for AI analysis comes from Form 5500, Levine does encourage plan sponsors to carefully review it for accuracy before submitting it annually. Plan sponsors may also find it helpful to brush up on the Department of Labor (DOL) publication, A Look At Plan Fees, to ensure a clear understanding. Additionally, it is imperative for plan sponsors to take the responsibility of benchmarking plan costs, services and performance seriously, and the 401k Averages Book may be helpful.
One thing plan sponsors do not have to do is shoulder all the risks of litigation alone: armed with Colonial’s liability coverage, if you face claims of alleged or actual breaches of duty in connection with the employee retirement plan, you’ll be protected with defense costs and penalty limits up to $1,000,000. At Colonial, a whole year of Fiduciary Liability coverage is less than a few dollars a day, and we even include Cyber Liability coverage to further protect you, your business and the retirement plan.
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