November 2011: Fiduciary Liability

  • Are Fiduciaries’ Personal Assets at Risk?
  • Are Fiduciaries subject to Lawsuits, Fines, and Penalties?
  • Are Fiduciaries liable for acts, errors, and omissions of outside entities that provide administrative and related services for pension and benefit plans?

The answer is yes to all the above, which is a startling revelation to many.

ERISA’s section 410(a) places strong personal liability on any person considered a “fiduciary” under the Act’s broad definition of the term. Companies can not simply indemnify their employees as ERISA limits the ability to indemnify them and prohibits fiduciary liability from being waived.

Who is a Fiduciary?

An individual (or organization) is deemed a fiduciary if that person (or entity) exercises any discretionary authority or control over the management of any type of pension or employee benefit plan.

Any person responsible for the investment, control, or disposition of assets held by the plan would be considered a fiduciary. (i.e. Anyone who renders investment or legal advice for a fee.)

In addition to business owners, examples of employees who can be held personally accountable are Human Resource Manager, Benefits Administrator, Bookkeeper, Chief Financial Officer, etc.

Fiduciary Responsibilities

The Employee Retirement Income Security Act of 1974 (ERISA) established strict standards of fiduciary conduct. Any fiduciary who breaches any of the responsibilities, obligations, or duties imposed by ERISA may be personally liable to compensate the plan for any resulting losses.

A fiduciary must:

  • discharge duties solely in the interests of the plan participants
  • exercise the level of care and skill characteristic of fiduciaries in a similar situation
  • diversify to minimize the risk of large losses
  • discharge duties in accordance with plan documents which are a key benchmark in assessing whether a fiduciary’s conduct was appropriate

Fiduciaries are also responsible for outside service providers such as: consulting firms, administration firms, actuarial firms, CPA firms, law firms, investment advisers and managers, and bank trust departments. However, they could be insulated from liability if the service provider is registered under the “Investment Company Act of 1940” so it is beneficial to request proof of registration.

Benefit Plans that Expose Fiduciaries

  • Pension Plans
  • 401K Plans
  • Group Health/Medical Insurance Plans
  • Dental/Vision Insurance Plans
  • Accident Insurance
  • Short and Long-Term Disability Insurance
  • Death/Life Insurance
  • Scholarship/Educational Reimbursement Plans
  • Vacation Benefits
  • Section 125/HSA Plans

Who Can Bring Action Against Fiduciaries?

ERISA and state trust law generally limit those who can bring claims against fiduciaries to plan participants and beneficiaries, government enforcement/regulatory groups (i.e. IRS, Department of Labor, Pension Benefit Guarantee Corp, Securities & Exchange Commission, State Attorneys General).

Common Claim Scenarios

The majority of fiduciary claims arise out of defined contribution plans (retirement plans) with the primary causes being:

  • Failure to follow-up on requested changes by a participant
  • Lack of investment guidance
  • Concentration of assets in company stock
  • Blackout periods barring employees from completing transactions
  • Restrictions on selling matching company stock contributions
  • Excessive fees
  • Loss associated with market meltdowns

The most common causes for claims arising out of handling of other defined benefit plans:

  • Actuarial solvency
  • Plan disclosures
  • Imprudent investments
  • Failure to pursue delinquent contributions
  • Mergers/termination of plans
  • Conversion to cash balance plan

Insurance Protection

Fiduciary Liability policies should be written to protect the personal assets of the individual fiduciary, the named insured organization, the named benefit plan assets, and the assets of any other allowable person/entity required by your business contracts for claims arising out of fiduciary acts, administrative acts, and liability arising out of third party administrators.

Various limits are available and the limit elected is determined by you based on your specific plans and exposures. The first factor to consider is the asset size of your pension plans. You then need to consider the employee benefit plans exposure keeping in mind that you are protecting the assets of your fiduciary/employee as well as your business entity.

How we can help you…

We can assist you in securing a Fiduciary Liability policy from the right carrier that can provide the needed protection arising out of your benefit plan(s) exposures. Contact us to discuss this valuable part of your insurance program protection.