Fiduciary liability under ERISA is an exposure individuals or organizations may have as a result of their position in relation to an employee benefits plan. ERISA fiduciaries can be personally liable for breaches, and can be held responsible for the breaches of co-fiduciaries. Either of these situations can impact a fiduciary financially; for individual fiduciaries, this can mean their personal assets may be at risk. Fiduciary liability insurance can offer some protection against this exposure.
Under ERISA, a fiduciary is any person (or organization) who the plan names as such, or who exercises discretionary authority or control with respect to the management or administration of a plan or its assets. This broad definition encompasses the plan sponsor, plan administrator, trustees, investment managers, consultants and actuaries, to name a few. On an individual level, it can snare the small business owner and employees who are involved in plan administration or management.
Legal liability can arise for plan fiduciaries when they are alleged to have failed in the obligations that ERISA establishes (prudence, acting in the best interests of plan beneficiaries, etc.). You don’t need a high-profile situation like Enron to trigger allegations of a fiduciary breach. Claims that a fiduciary duty has been breached can involve situations such as benefit claim denials; a reduction in benefits; inadequate plan funding; plan terminations; or questionable choice of an outside service provider, insurance company, or investment management firm. These claims can be filed by plan participants or beneficiaries, by a government agency (such as the Department of Labor), or by another fiduciary.
Fiduciary liability insurance can protect an insured fiduciary against the legal liability arising from alleged breaches of the duty, including the cost of the fiduciary’s defense. Fiduciary liability insurance should not be confused with a fidelity bond or with employee benefits liability insurance. A fidelity bond (also known as an ERISA bond) is for situations involving dishonesty, and its protections are for the plan and its beneficiaries. Employee benefits liability insurance protects against claims of administrative errors, and thus is quite narrow in its scope. Neither of these affords protection to a fiduciary that, for example, is alleged to have been imprudent in selecting an investment management firm for the company’s 401(k) plan.
Like any type of insurance, fiduciary liability insurance policies can vary, and finding the policy that is the best fit for you and your business requires research and understanding of the available options. The International Foundation of Employee Benefit Plans posts on its Web site a “Short List” of questions to ask when investigating these policies. For example, whom does the policy cover? Does the policy cover multiple plans and, if so, to what limits, and what would be the cost of covering each plan separately? Are defense costs counted against the plan’s indemnity limit? Is there coverage for penalties, fines or taxes assessed against fiduciaries?
These and other questions should form the basis for your conversation with your insurance broker when assessing the type of fiduciary liability insurance that is best for you and your business.
Thorough plan oversight, use of qualified benefit plan professionals, and proper training of employees who handle benefit plan functions are the key elements to ERISA compliance. However, an appropriate fiduciary liability insurance policy is a must for those situations when, for whatever reason, a fiduciary breach is alleged to have occurred.