The phrase “fiduciary liability” is probably familiar to you in the context of corporate directors and officers, and their fiduciary responsibilities to a company. However, there is another type of fiduciary liability which many suggest is equally, if not more, important.
Who is a Fiduciary?
The Employee Retirement Income Security Act of 1974 (ERISA) classifies individuals providing, involved and/or charged with developing, administering and overseeing a company’s benefit or welfare employee benefit plans as fiduciaries. These include plan administrators, trustees, company officers and directors, and human resource personnel. In academic terms, a fiduciary is “any person/organization who has discretionary authority over the administration or management of a plan or its assets.” This includes exercising authority.
In addition to independent administrators or trustees, lawsuits also target the employer and the employee welfare/benefit plan itself. Furthermore, the Department of Labor has taken the position that even an individual who would ordinarily not be a fiduciary because of his or her title, becomes one if he/she fulfills fiduciary-type functions. In other words, if it looks like a duck and sounds like a duck – it’s a duck.
Why Should Employers Care?
So why should you care about ERISA and the potential for fiduciary liability claims? Because:
- A fiduciary’s personal assets (car, home, bank accounts, etc.) are at risk and can be taken to pay fiduciary losses (see ERISA Section 409(a)).
- Fiduciary liability claims are expensive, with defense expenses often exceeding the damages awarded. A 2004 Tillinghast Towers Perrin Fiduciary Liability Survey stated the average defense cost per fiduciary liability claim was $365,000, with damages averaging just under $1 million. Though nearly ten years old, these average defense expenses still hold true today. The cause of most claims is “denial of benefits,” followed by “misleading representations” and “communication of plan benefits.”
- Even if you hired the ‘best’ third-party administrator (TPA) for your 401(k) plan or managed care arrangements, your personal liability and fiduciary obligations don’t evaporate. You can delegate a function, but cannot absolve yourself of your fiduciary responsibility.
- There is no immunity from fiduciary liability lawsuits. Small businesses are not exempt from fiduciary liability lawsuits because “they only have a [fill in the type of plan] for their employees.”
- It makes good business sense to pay attention to how your company’s employee welfare and pension plans operate and are administered.
Funding Fiduciary Liability Losses
Fiduciary liability losses are usually low in frequency and high in severity (although Enron’s and WorldCom’s fiduciary breaches have heightened employees’ awareness about employers’ and fiduciaries’ responsibilities). For example:
- Trustees of a profit sharing plan were accused of improperly concentrating plan investments in a single industry and investing a high proportion of the plan’s assets in a limited number of stocks. Loss: $439,560.
- An employee’s estate brought suit against an employer alleging breaches of fiduciary duty through failure to notify the employee of a change in his insurance coverage status and failure to correct the oversight. The employer was ordered to pay medical expenses, statutory penalties, attorneys’ fees and costs. Loss: $172,000.
- A health plan trustee allegedly did not monitor the performance of a TPA and retained the company despite its inadequate performance. Loss: $230,000.
Fiduciary Liability Insurance – What It’s Not
Fortunately, ERISA allows companies and fiduciaries to finance these losses with fiduciary liability insurance. Before brushing this off by saying, “I have insurance for this,” read on to find out what fiduciary liability insurance isn’t.
Fiduciary liability insurance is not the same as a fidelity bond. ERISA requires every company offering a pension, profit sharing, 401(k), or similar benefit plan to insure against losses arising out of an employee or plan administrator embezzling funds from the benefit plan. Employers can comply with this requirement by adding an ERISA compliance endorsement to their crime insurance policy. This fidelity coverage is NOT the fiduciary liability insurance your firm should purchase.
Fiduciary liability insurance is not the same as directors’ and officers’ liability coverage. In fact, most directors’ and officers’ liability policies specifically exclude coverage for losses arising out of ERISA violations.
Fiduciary liability insurance is not the same as employee benefits liability insurance. Employee benefits liability insurance covers losses arising out of administrative errors, such as failing to enroll an employee in a health plan, mishandling an employee benefit program’s records, and erroneously interpreting employee benefit programs. This coverage is usually provided via an endorsement to your commercial general liability policy.
Pull out the binder holding your property and casualty insurance policies. Do you have a fiduciary liability policy? If not, call your agent and tell him/her to get you a quote as soon as possible. It can be one of the best investments you’ve ever made.
By Joy M. Gänder, CPCU, ARM
Copyright © 2015 Gänder Consulting Group, LLC
Phone: (608) 286-0286 │Fax: (608) 442-6811