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)
- ESOP's
- 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!
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