Fiduciary Liability Insurance

Are you a fiduciary? Are your personal assets at risk? Are you subject to law suits, fines, and penalties? Many people are and don’t know it.

The rules and regulations of the Employee Retirement Income Security Act of 1974 (ERISA) include very strict guidelines for fiduciaries of plans that fall under ERISA control. Some of the plans that are subject to ERISA regulations include the following:

■Pension plans
■Profit-sharing plans
■Thrift and savings plans (such as 401k plans)
■Welfare plans (such as life insurance, hospital and medical insurance, disability insurance, and prepaid legal services)
ERISA’s definition of an employee benefit plan is very broad and can include any plan, fund, or program established or maintained for the purpose of providing employee benefits to its participants or their beneficiaries.

Today, most employers have one or more plans for their employees that fall under ERISA guidelines. Who are the fiduciaries of these plans?

According to ERISA, a fiduciary is any person so named in a plan or any person who exercises any discretionary authority or control with respect to the management or administration of the plan or its assets. This will normally include the plan sponsor, the plan administrator, trustees, and investment managers along with any other persons, including employees who are involved with any aspect of handling the plan or its assets.

Strict standards are in place for fiduciaries and any breach of their responsibilities can result in lawsuits and statutory penalties. A lawsuit against a fiduciary can be filed by the Secretary of Labor, any plan participant or beneficiary, or by another plan fiduciary. The Treasury Department and the Pension Benefit Guarantee Corporation can also impose penalties or bring lawsuits against plan fiduciaries.

The plan sponsor (normally the employer of the plan participants) has a major financial risk if found liable, but is not the only one at risk. Individual fiduciaries are held personally liable for plan losses resulting from their breach of duties which can result in serious personal financial consequences.

How can you protect your company, your plans, and your individual fiduciaries? Several insurance companies are writing fiduciary liability or pension trust liability insurance. This coverage provides protection for losses that the insured is legally obligated to pay because of a claim made for a wrongful act. By most policy definitions, a wrongful act includes any violation of the responsibilities, obligations, or duties imposed on fiduciaries by ERISA, as well as acts, errors, or omissions involved in plan administration. The policy also includes coverage for defense costs in connection with a covered claim.

Under the law, a fiduciary can also be held liable for the acts of a co-fiduciary. This means that the plan sponsor and individual fiduciaries can be subject to claims that arise out of the actions of various organizations that provide services to the plan. These can include consulting firms, professional administration firms, investment management companies, accounting firms, law firms, etc.

The insureds under this coverage will normally include the sponsor organization, the plans, and the individual fiduciaries. One important area to review when obtaining this coverage is the recourse provision. Most carriers will waive all rights to recourse against the individual fiduciaries, but some carriers still include a provision for recourse only if there is a proven breach of fiduciary obligation.

There has been a lot of confusion regarding the differences between the fidelity bond that is required by ERISA, fiduciary liability insurance, and employee benefits liability insurance. The fidelity bond only applies to dishonest acts on the part of the plan trustees. Employee benefits liability insurance normally only applies to claims rising out of administrative errors and is very limited. Many insureds think that by having employee benefits liability coverage, they do not need fiduciary liability coverage. That is definitely not true!

While fiduciary liability insurance is one answer to limiting the liability risks of the sponsor and fiduciaries, there are other steps that should be taken to make sure all of the ERISA guidelines and requirements are met.

Use experienced firms to establish and administer employee benefit plans. Have an actuarial firm review your plans annually. Have a law firm with experience in ERISA regulations review the plans on a regular basis to make sure they are in compliance with ERISA. Use established investment firms for decisions regarding the investment and handling of plan assets. And finally, choose plan fiduciaries and administrators carefully, making sure they are not in violation of any ERISA restrictions. Regular performance reviews should also be done.

Remember — nothing can totally prevent law suits, but proper management practices and a complete insurance program can go a long way to limit your risk!