A fiduciary is an organization or individual who exercises authority or control over the management of an employee benefits plan. Specifically, fiduciaries are those responsible for investing, controlling or disposing of assets held by the plan.
Company representatives involved in managing pensions, savings, profit-sharing, employee benefits and welfare plans are liable if they breach their fiduciary duties. If this responsibility belongs to you, it is imperative that you understand how to avoid potential liability. In fact, fiduciaries that do not follow the basic standards of conduct may be personally liable to restore any losses to the plan or profits made through an improper use of the plans assets as a direct result of their actions. Fiduciary Liability insurance is one risk management strategy that protects you and your organization against losses associated with fiduciary error.
Fiduciary Liability Insurance
Fiduciary Liability insurance protects fiduciaries against legal liability for claims arising out of their positions. These policies are stand-alone, yet there are several other protections available for organizations wishing to protect themselves:
- Fidelity bonds are required under ERISA and are designed for safeguarding beneficiaries when administrators or trustees financially harm an employee benefits plan; this bonding insurance is only designed to help the plan and beneficiaries and will not protect the trustees from liability claims
- Employee Benefit Liability (EBL) insurance covers claims arising out of errors or omissions while administering a benefits plan; EBL does not protect against all fiduciary responsibilities and may be included in a Fiduciary Liability policy
In addition to these coverages, similar protection may be adopted using Directors and Officers (D&O) Liability insurance, Commercial General Liability (CGL) or Trust E&O/Professional Liability coverage with an endorsement covering fiduciary liabilities.
ERISA imposes stringent reporting and disclosure requirements on plan fiduciaries, as well as numerous duties and standards of conduct. ERISA specifically states that plan fiduciaries who fail to meet any of these responsibilities or other reporting and disclosure requirements may be held personally liable for any resulting losses to the plan. Here is a partial list of those duties:
- Act exclusively for the benefit of plan participants
- Act as a prudent person would under similar circumstances
- Ensure that investments are diversified except where provided otherwise in the plan
- Monitor performance of investments and outside professionals
- Act in strict compliance with plan documents
- Understand and comply with complex rules of ERISA, the IRS and the Department of Labor
- Provide a mechanism to obtain sufficient information and education to allow participants to make informed decisions
Claim Scenario
Two employees approaching retirement age discovered they had never enrolled in the company’s 401(k) plan. The employees sued the company and plan trustees alleging the plan administrators failed to properly advise them on how to enroll, and the enrollment process was not automatic. The value of the alleged lost benefits exceeded $150,000, and defense expenses were in excess of $200,000.
Total claim = $400,000
Source: Travelers Casualty and Surety Company
