Important Fiduciary Liability Policies for Businesses

In today’s job market, a good employee benefits program is the key to attracting committed, quality employees.  Yet, even though an employee benefits program is a good thing for both employer and employee, there are many pitfalls that an employer must be aware of.

In many cases, the employer or its owner will be the plan’s fiduciary.  And, a fiduciary is responsible for the successful administration of the program.  However, when the market takes a sudden downturn, or the plan gets bad investment advice, it is often the fiduciary that is in the crosshairs.  How can a fiduciary be protected?

Fiduciary Liability Basics

In 1974, Congress passed the Employee Retirement Income Security Act or ERISA.  One of the goals of ERISA is to protect the retirement savings of workers.  It does this by imposing certain obligations in connection with the administration of a plan.  Further, ERISA requires a plan to name a fiduciary who is responsible for the administration of the plan.  A plan’s fiduciary is usually an officer or director of the plan sponsor.  ERISA imposes a duty on a fiduciary to act in the best interests of the plan.  If something goes wrong and the plan is no longer able to provide the promised benefits, it is the fiduciary who is often blamed and sued.

ERISA plans are required to have a fidelity bond in the amount of ten percent (10%) of the plan’s assets.  A fidelity bond protects a plan from the losses caused by fraud or dishonesty up to the amount of the bond.  However, a fidelity bond does not protect a fiduciary against claims of breach of fiduciary duty.  That protection can only be provided by insurance.  While some aspects of fiduciary risk might be covered by a directors and officers (D&O) or commercial general liability insurance policy, this is rare. A fiduciary can only be protected against claims of breach of fiduciary duty by a fiduciary liability insurance policy.

Fiduciary Liability Insurance: What it’s No

Fiduciary liability insurance protects a fiduciary against claims that they failed to properly administer the plan.  The fiduciary duty is the highest duty under the law.  Allegations of breach of fiduciary duty usually entail things like poor investment decisions, failure to properly maintain plan records or negligence in the hiring and supervision of service providers.  A fiduciary is personally liable for their failures.  A fiduciary cannot be indemnified by the plan.  The plan sponsor can indemnify a fiduciary, but that would generally be too costly for most employers, especially small employers.

The answer is a fiduciary liability insurance policy.  There are many different types of policies offered by many different insurance companies.  A policy can cover all of an employer’s plans or a specified number of plans.  It can cover all fiduciaries or be limited to a few, named fiduciaries.  It can cover the cost of attorneys to represent the fiduciary in litigation and can cover damages awarded against a fiduciary, including punitive damages and fines.  Most importantly, it protects fiduciaries against personal liability for damages.

Conclusion

The administration of an employee benefits program is a complex undertaking.  There are a large number of rules imposed by ERISA and the Internal Revenue Code, and the plan’s fiduciary is ultimately responsible for ensuring that the plan and its service providers comply with these complicated rules.  Any problem in the administration of the plan can have disastrous results.  In addition, market fluctuations or bad investment advice can jeopardize employees’ retirement savings.  The fall guy is usually the fiduciary.  It is imperative that the plan sponsor buy fiduciary liability insurance to protect the fiduciary against claims of breach of fiduciary duty.

The type of policy that a business needs depends upon the size of the business and the plan and the experience of the fiduciary.  For that reason, a fiduciary liability policy must be tailor-made for the business.  A plan sponsor must enlist the help of an experienced insurance agent to guarantee that your company and the plan’s fiduciaries get the protection they need. Contact RMC Group to learn more about fiduciary liability and coverage at 239-298-8210 or rmc@rmcgp.com.

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