If you administer an employee benefit plan, you have a fiduciary duty. Fiduciary liability insurance could offer vital protection against lawsuits and financial loss.
What is fiduciary duty?
A fiduciary is anyone who manages assets for another person. Fiduciary duty refers to a legal and ethical responsibility to manage those assets in the best interests of the person who owns them.
In terms of employee benefits, the plan administrators in charge of managing the plan and the plan assets are fiduciaries. Plan trustees and members of a plan’s investment committee are also fiduciaries. If you have control over the plan management, assets or administration, or if you provide investment advice to a plan for compensation, you are a fiduciary.
Under the Employee Retirement Income Security Act (ERISA), fiduciaries must act prudently and diversify the plan’s investment in a way that minimizes the risk of large losses. They must also avoid conflicts of interest. Plus, fiduciaries must follow the terms of the plan documents, if these documents are consistent with ERISA.
Plan Sponsors, Fiduciaries and Personal Assets
If a plan sponsor faces accusations of breaching their fiduciary duty, it’s not just the company itself that may suffer financial consequences – the individuals may also be on the hook.
As a fiduciary, you could be held personally liable for plan mismanagement, which could put your personal assets at risk. According to the U.S. Department of Labor, fiduciaries who do not uphold their fiduciary duties can be held personally liable to restore any losses that the plan incurred or to restore any profits that were made through improper use of plan assets.
Lawsuits Involving Retirement and Employee Benefit Plan Administration
If employees feel they are not receiving the benefits owed to them due to negligence or mismanagement, they can file a lawsuit under ERISA. There are many scenarios in which a lawsuit may occur, such as:
- Poor investment decisions that harmed retirement funds. This could happen due to a conflict of interest – for example, if a plan administrator invested retirement plan funds into a particular company because he had a personal connection to the company or because the plan administrator made investment decisions based on factors unrelated to financial performance.
- Third-party service providers that were not vetted. Plan administrators don’t get to pass the buck to third-party service providers; the ultimate responsibility lies with the plan’s fiduciaries. They are responsible for selecting third-party service providers carefully and monitoring their work to ensure continued performance and adherence to high standards.
- Changes or decisions were made that were not in line with plan documents. Plan administrators have to follow the plan documents, at least as long as those plan documents are allowed under ERISA. If the plan administrators decide to change benefits or eligibility in a way that goes against the plan documents, they could face accusations of breaching their fiduciary duty.
- The plan was administered negligently. Various errors and omissions in the course of plan administration may trigger lawsuits if they have a negative impact on the plan assets. These issues do not need to be intentional to result in litigation. In fact, overworked or inexperienced plan administrators may be especially vulnerable to the types of mistakes that cause legal action.
How does fiduciary liability insurance work?
Fiduciary liability insurance provides coverage against claims that a company mismanaged an employee benefit plan or the plan assets. It offers important protection for both the company and its fiduciaries.
If your company is sued for a breach of fiduciary duty, fiduciary liability insurance can help cover defense costs and awards or settlements, subject to the terms of the policy.
There’s Money on the Line
Workers depend on their employee benefits. Mismanagement of plans may mean they lose a substantial amount of money. As a result, the lawsuits may also involve substantial sums.
For example, according to Insurance Business, UnitedHealth Group has agreed to pay $69 million to resolve allegations that it breached its fiduciary duties in the administration of its 401(k) plan. The lawsuit accused the company of imprudently selecting and retaining the Wells Fargo Target Fund Suite as an investment option, describing it as “a suite of poorly performing funds.”
Not all lawsuits are for tens of millions of dollars, but they may still be costly. When multiple employees are impacted (as is often the case), the risk of a class action lawsuit is high, which may further increase costs. In addition to the settlement or award, companies facing lawsuits may have to pay significant defense costs.
Fiduciary Liability Insurance vs. Employee Benefits Liability Coverage
Fiduciary liability insurance is a standalone policy that you can purchase to gain coverage for lawsuits alleging a breach of fiduciary duty.
Employee benefits liability coverage is typically an endorsement that you can add to another type of insurance policy, such as a general liability insurance policy. While it provides some coverage, it does not offer the same scope of coverage as fiduciary liability insurance, and you should not view it as a replacement. Importantly, employee benefits liability coverage provides coverage for errors and omissions in plan administration, but it does not provide coverage for other claims, such as poor investment decisions or conflicts of interest.
Do you have sufficient fiduciary liability insurance?
If your company provides employee benefits, it’s smart to secure fiduciary liability insurance. Additionally, if you could personally be considered a fiduciary under ERISA, it is in your best interests to verify that your company maintains fiduciary liability insurance that covers you.
If you are sued for a breach of fiduciary duty, other types of liability insurance will not provide coverage – you’ll need fiduciary liability insurance. However, not all fiduciary liability insurance policies are the same. Consider the following questions:
- Which plans does the policy cover? Does the policy only cover plans that are subject to ERISA or all employee benefit plans the company offers?
- What costs does the policy cover? Does the policy cover civil penalties? What about punitive damages?
- What are the exclusions? Does the coverage exclude any types of allegations? Fiduciary liability coverage typically excludes intentional or illegal acts. Check the policy terms to see if any other exclusions apply.
- Has an experienced insurance broker reviewed your risks and coverage? Fiduciary liability insurance is a particularly complex area of insurance. An insurance broker who is experienced with this type of policy will help you understand your coverage needs so you have the right insurance in place before a lawsuit happens.
Need help securing fiduciary liability coverage?
Many plan administrators become nervous when they realize that they could be held personally responsible for plan mismanagement. No one wants to face a lawsuit – especially not without adequate insurance coverage. Fiduciary liability coverage can provide peace of mind and financial protection.
Higginbotham can help you review your coverage needs. Talk to one of our insurance and risk management professionals to learn more.
