Fiduciary liability is a critical topic for trustees of qualified plans, as well as officers or directors of the company providing the plan(s). Know that you could be held PERSONALLY liable. Your family’s assets are at risk!
First, a quick course on what coverages you may need related to benefit and retirement plans.
- Employee Dishonesty – ERISA mandates this coverage to protect the assets of plan participants from theft or fraud by plan officials. You must insure for at least 10% of the plan assets with a $1,000 minimum and a $500,000 maximum per plan. Relatively few employers are exempt. You must cover all plans, including “non-qualified plans”. If you provide benefits to your employees, you are probably subject to this regulation. This requirement can be met through a separate ERISA bond or as an endorsement to the company’s employee dishonesty policy. Each plan should be named on the policy or through an omnibus endorsement. The expense of this policy/endorsement may be charged to the plan and may be paid from plan assets.
- Employee Benefits Liability (EBL) – This coverage is much narrower than fiduciary liability as it covers administrative exposure only and contains an ERISA exclusion. This is normally an endorsement to the Commercial General Liability (CGL) policy.
- Fiduciary Liability Insurance – This policy is much broader than EBL. Rather than just addressing administrative errors, it offers discretionary judgment coverage to protect the personal assets of plan administrators, officers, and other responsible parties.
Many business owners and executives assume that, if they offer their employees an array of investment options in their 401(k) plan, it will protect them from lawsuits. Be aware that ERISA holds fiduciaries responsible for making prudent selections of investment options when they first establish the plan. Furthermore, ERISA says the fiduciary must continually monitor the performance of the investments, changing them as necessary, and making sure that plan expenses are reasonable. Failure to do so can result in personal liability for losses of the plan, a 20% penalty, and payment of attorney’s fees and costs.
Fiduciary Liability Insurance offers protection for:
• Breach of fiduciary duties under ERISA and similar statutes;
• Negligent errors and omissions;
• Improper disclosures to plan participants;
• Remiss investment strategies;
• Imprudent choice of insurance company, mutual fund, or third-party service provider;
• Faulty advice or counsel;
• Improper amendments to plan documents.
Fiduciary coverage can be relatively inexpensive. Before you dismiss this coverage, consider whether you can provide documentation that you take all the steps necessary under ERISA in the event that the DOL or a plan participant raises questions.