Acting as a fiduciary is a huge responsibility. It means you promise to act on behalf and in the best interest of another person or multiple people. The more people who have placed their trust in you, the greater your responsibility.
Of course, with great responsibility comes the threat of liability.
The Employment Retirement Income Security Act of 1974, or ERISA, holds benefit plan sponsors and their trustees or fiduciaries personally liable for losses to the company’s benefit plan if they breach their fiduciary duties.
“Even an administrative error or omission on the part of the fiduciaries of an employee benefit plan can result in a lawsuit, requiring significant attorney fees, and ultimate judgment against the plan trustees personally,” says Damian Caracciolo, vice president of executive protection practice at Cbiz Inc. Lawsuits may even extend beyond plan trustees and fiduciaries to include the plan sponsor’s board and individual employees, he says.
“Companies that offer employee benefit plans can’t avoid liability by blaming plan participants for investment decisions and can’t escape responsibility by hiring or blaming a service provider,” says Wendy Von Wald, fiduciary liability product manager at insurance company Travelers. The U.S. Department of Labor places responsibility for vetting and monitoring outside vendors on fiduciaries themselves.
All of this responsibility points to the need for fiduciaries to seriously consider getting fiduciary liability insurance. Here are answers to common queries about fiduciary liability insurance, including:
— What is fiduciary liability insurance?
— What does fiduciary liability insurance cover?
— Who should get fiduciary liability insurance?
— How much does fiduciary liability insurance cost?
Read on for answers to these questions and more information on insurance for fiduciaries.
What Is Fiduciary Liability Insurance?
Fiduciary liability insurance protects both a company and its fiduciaries from claims of a breach in fiduciary duty. Covered parties can include the company offering the plan as well as anyone acting on its behalf in a fiduciary role, Von Wald says.
“This insurance provides protection against damages and defense costs arising from the administration and management of employee benefits and pension plans for both the corporation as well as individuals,” says Dennis B. LeVasseur, senior vice president of sales at Bryn Mawr Trust Insurance Advisors.
Fiduciary liability insurance is not to be confused with an ERISA bond, employment benefits liability (EBL) or investment advisor errors and omissions (E&O) coverage.
“An ERISA bond is first-party coverage that pays the plan for any loss from theft of plan assets,” LeVasseur says. “EBL coverage generally includes claims that involve administrative errors and omissions.” These can include handling records. They can also include enrolling, terminating or canceling employees or interpreting plan benefits.
“Fiduciary liability, in contrast to EBL coverage, not only covers administrative errors and omissions but also your personal liability for a breach of a fiduciary duty in connection with an employee benefit plan,” he says.
Investment advisor E&O, on the other hand, protects investment advisory firms and their employees from lawsuits by clients claiming a negligent act, error, omission or breach of fiduciary duty.
“While it does protect them while acting in a fiduciary capacity, it is a different product and coverage than fiduciary liability insurance for those acting as plan sponsors, trustees or fiduciaries of a sponsored employee benefit plan,” Caracciolo says. “The term fiduciary liability is often used interchangeably but does have its own requirements under ERISA and SEC oversight.”
What Fiduciary Liability Insurance Covers
Fiduciary liability insurance can cover against numerous claim allegations, including:
— A breach of ERISA fiduciary duties
— Negligent administration of the benefit plan
— Careless plan management
— Poor investment decisions
— Improper use of retirement funds
— Changing or improperly denying benefits
— Failing to monitor a service provider or third-party vendor
— Civil penalties for inadvertent violation of ERISA sections
— Obligations related to health insurance or health care privacy law
— Administrative errors and omissions
— Charging excessive fees
“Insurance policies should be tailored to meet the specific risk transfer needs of each investment advisory firm,” Caracciolo says.
Who Should Get Fiduciary Liability Insurance?
“Any company that offers employee benefit plans should strongly consider purchasing a fiduciary liability insurance policy to protect the organization and those individuals serving in fiduciary roles,” Von Wald says.
These include retirement plans as well as welfare plans such as medical, life and disability.
“A common misconception is that if you sponsor a 404(c) plan, commonly referred to as a participant-directed 401(k), you will eliminate your personal liability,” Caracciolo says. While a 404(c) plan can mitigate your personal liability, you will still be responsible for selecting and monitoring plan providers. Thus, you can still be held personally liable for any claims arising from that firm’s activities on behalf of the company, he says.
How Much Fiduciary Liability Insurance Costs
The cost of fiduciary liability insurance varies by policy. “A number of factors are taken into consideration during the underwriting of each policy,” such as plan assets and desired policy limits, Von Wald says. Other factors include the number of employees or plan participants, history of past claims and the nature of the business.
Premiums for fiduciary liability insurance are on the rise as the number of 401(k) lawsuits has increased. “The rules and regulations governing employee benefits are constantly changing, and litigation involving pension plans is expected to increase as a result of more stringent oversight by regulatory agencies, industry ‘watchdog groups’ and plan participants,” Caracciolo says.
Given that the burden of proof for compliance with ERISA lies with the sponsor or employer, most cannot afford to be reactive, he says. “With average attorney fees of $250 per hour to — in some cases — $500 per hour, even frivolous allegations will be costly to defend.”
If cost is a factor in deciding whether to get fiduciary liability insurance, LeVasseur puts it in perspective: The insurance will be less costly than battling an uninsured fiduciary claim.
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