Emerging Business Insights
Is Your Business Managing Fiduciary Liability Exposures to Avoid Uncovered Losses?
FEBRUARY 6, 2024
Since the Employee Retirement Income Security Act (ERISA) was passed in 1974, nearly every organization in the United States offering employee retirement and benefit plans faces significant fiduciary liability exposures pertaining to the administration of these plans.
However, many organizations do not recognize these exposures; a recent survey reports that 43% of fiduciaries do not identify themselves as such.¹ This can open the door to uncovered losses, including regulatory fines and penalties.
Who Is a Fiduciary?
Under ERISA, a plan fiduciary:
- Is any person who exercises discretionary authority or control over plan assets or administration or may give investment advice
- May be personally liable for losses and lost opportunity costs resulting from breaches of duty
For a company, fiduciaries of retirement and benefit plans can include:
- Corporate directors and officers, especially if they appoint other fiduciaries (e.g., asset managers), since some courts have ruled that directors and officers have a duty of oversight
- Service providers such as consulting firms, professional administration firms, actuarial consulting firms, CPA firms, law firms, investment advisors, investment management companies, and bank trust departments
Plan fiduciaries with limited experience and awareness may increase an employer’s litigation risk.
Since ERISA creates personal liability for fiduciaries, it’s vital that companies offering retirement or benefit plans as defined by ERISA conduct appropriate due diligence when considering their offerings, and secure insurance to protect both the organization and individual fiduciaries in the event of a claim. Employers also have a common law duty to avoid errors and omissions in the administration of employee benefit plans.
ERISA Bonds
Many plan sponsors are familiar with the bonding requirements posed by ERISA (these may be referred to as “ERISA bonds” or “fidelity bonds”). The ERISA bond insures a plan against losses due to fraud or dishonesty. Every employee benefit plan is required to have an ERISA bond.
The ERISA bond protects plan participants, but the fiduciary liability insurance covers the business owners and individuals who operate the plan. Many people mistakenly believe if the bond requirement is met, they are protected from liability. ERISA does not require plan sponsors to purchase fiduciary liability insurance, which leads many to overlook this valuable coverage.
Fiduciary Liability Policies
Fiduciary liability insurance covers:
- Claims related to fiduciary duties (discretionary)
- Claims related to administrative duties (non-discretionary)
- Claims made against individual fiduciaries because of their status as such, or because of the actions of third parties for whom they are vicariously liable
Claims for breaches of both discretionary and non-discretionary (administrative) duties are covered by fiduciary liability policies. Many organizations carry an “employee benefits liability” endorsement on their general liability or businessowners policies; this endorsement is designed to respond to claims for non-discretionary, administrative errors and omissions only, and will not respond to claims alleging a breach of discretionary duty.
For this reason, employers/plan sponsors should elect to carry fiduciary liability policies, which provide broader insuring agreements and can offer a range of additional coverage enhancements (typically achieved via policy endorsements) to structure adequate protection.
| Claims Arising Out of Discretionary Duty | Claims Arising Out of Administration (Non-Discretionary) Duty |
|
|
Click the below coverage scenarios to see how fiduciary liability insurance can protect businesses.
An employer is sued by several current and former employees who participated in the company’s 401(k) plan. The plan’s investment manager was found to have invested plan assets with several high-risk funds that were not properly diversified, and significant assets were lost.
The plan participants sued the employer for failure to select a competent investment manager, and the claim cost hundreds of thousands of dollars in defense and settlement, which were covered by their fiduciary liability insurer.
An employer offering a group medical plan recently hired a new employee, who immediately filled out all the paperwork to enroll himself in the plan. Unfortunately, the HR department did not submit the paperwork to the insurance company in a timely manner, and when the employee was seriously injured in an a non-work-related several weeks later, coverage was denied for his medical bills; the insurance company asserted they had never received his enrollment paperwork.
The injured employee sued the employer, and hundreds of thousands of dollars of bills and legal fees were covered by their fiduciary liability insurer.
Protect Your Business Today With Fiduciary Liability Insurance
USI Insurance Services helps our clients identify their fiduciary liability exposures and tailor coverage to meet the unique needs of their businesses. Through our exclusive USI ExecuSafe management liability program, we partner with top-rated insurance companies to offer pre-negotiated enhancements for fiduciary liability, which reduce gaps in coverage that exist under most off-the-shelf policies. This is an inexpensive, yet vital line of insurance for all employers that have retirement and/or employee benefit plans.
How USI Can Help
USI can work with you to:
- Review your current retirement and employee benefit plan offerings to determine your fiduciary liability exposures
- Analyze existing fiduciary liability policies (if currently purchased) and identify gaps in coverage that could lead to uncovered losses
- Recommend key enhancements offered through USI’s ExecuSafe program
- Negotiate with insurance companies and secure appropriate coverage to address your exposures
In addition to the exposures discussed in this article, USI’s analysis of management liability insurance programs can identify other opportunities to reduce uninsured exposures and create premium savings. To learn more about the risk management services available through USI, email select.business@usi.com.
SUBSCRIBE
Get USI insights delivered to your inbox monthly.
