An increase in the number of court cases and class action settlements involving the management of employer-sponsored retirement plans has cast a spotlight on the fiduciary liability of plan sponsors. It has also emboldened employee groups in companies of all sizes to confront plan sponsors over issues and practices that they deem harmful to their retirement assets. For plan sponsors, their exposure to personal liability has never been higher.
Fiduciary Liability Exposure
Under the Employee Retirement Income Security Act (ERISA), anyone acting in a fiduciary capacity in managing a qualified retirement plan can be held personally liable for a breach of obligations. The law casts a wide net over anyone inside or outside the company who exercises discretionary authority in administering and managing the plan, or controlling the plan’s assets. If it is determined that the plan has been improperly managed or employees suffered a loss in benefits due to inadequate information or guidance, it is considered a breach of fiduciary duties. The exposure to fiduciaries begins with the cost of an investigation into the breach and expands through litigation and legal claims.
Many Employers Lack Proper Coverage
Until the spike in litigation against plan sponsors, many employers were unaware of fiduciary liability insurance coverage. The lack of awareness can be attributed in part to the fact that it is not mandated by ERISA. It can also be attributed to a misunderstanding of the coverage available through other liability policies, such as errors and omissions (E&O) coverage or employee benefits liability insurance. E&O insurance only covers liabilities occurring with customers, not employees, and employee benefits liability insurance only covers administrative errors, not the management of plan assets. Many plan sponsors mistakenly believe that their ERISA fidelity bond, which is mandated coverage, provides protection against fiduciary liability, but it only protects them in the case of fraudulent acts against the plan.
How Fiduciary Liability Coverage Works
Only a fiduciary liability insurance policy can protect the assets of the company and individuals acting in a fiduciary capacity against fiduciary-related claims. Policyholders are covered for legal expenses and any financial losses experienced by the plan due to breach of fiduciary duty. This may include providing poor or negligent investment practices, failure to offer appropriate investment options, charging unreasonable fees or any action or decision deemed not in the best interest of the plan participants. Any divergence from the plan document in administering or managing the plan could be considered a breach of fiduciary duty, as can inadequate communications and a lack of guidance and educational services.
Expanded Coverage for Fiduciaries
Fiduciary liability insurance coverage can be expanded to cover potential costs outside the normal scope of coverage. This could include the cost of pre-claim investigations by the U.S. Department of Labor (DOL), which has jurisdiction over employer-sponsored retirement plans. Fiduciary liability insurance only covers the cost of claim defense. However, DOL audits of plan sponsors are increasing and becoming more extensive. Pre-claim investigation coverage reimburses the employer for the legal expense of having an attorney present during the audit. Fiduciary liability coverage can also be expanded to include the cost of business expenses incurred when a plan sponsor is required to change or amend the plan in order to bring it into compliance. These types of expanded coverage require additional premiums.
Plan Sponsors Responsible for Outside Fiduciaries
Fiduciary insurance coverage can be issued for anyone within the company who is engaged in fiduciary roles. Outside advisors or providers who also act in a fiduciary capacity for the plan must secure their own coverage. Company fiduciaries need to be aware that, if a fiduciary breach occurs through an outside fiduciary, the liability also extends to them. Company fiduciaries cannot absolve themselves of fiduciary responsibilities by hiring outside advisors to perform a fiduciary function. At best, the outside advisor only shares the fiduciary responsibility of the plan sponsor.