Fiduciary Liability

The Employee Retirement Income Security Act (ERISA) was enacted in 1974. This law imposes various duties, responsibilities and liabilities on those serving as fiduciaries of employee benefit plans. ERISA also states that those plan fiduciaries who fail to meet their responsibilities may be held personally liable for losses to the plan. A fiduciary can either be an individual or entity, is responsible for the management of the plans or assets, or has discretionary responsibility for the administration of the plan. The types of duties imposed by ERISA on fiduciaries can include making sure that plan assets are diversified, monitoring performance of investments and outside professionals engaged by the company and providing information and education to plan participants to help them make informed decisions.

The types of plans governed by ERISA include funds or plans that provide retirement income to employees, deferred income until employment is terminated (or later), and those plans that provide medical and related benefits. In addition to these types of basic plans, Employee Stock Ownership Plans (ESOPs) and multi-employer (labor trust plans / union plans) also have designated individuals/entities acting in a similar fiduciary capacity.

Fiduciary Liability Insurance is designed to protect past, present and future directors, officers, employees, trustees and others who serve as fiduciaries to a company’s pension and welfare plans. Coverage can also protect the entity and its sponsored plans. Claims can be brought by employees, the Department of Labor and other federal agencies, and allegations can include improper advice and counsel, wrongful termination of a plan, administrative errors, mistakes in benefit calculation, denial of benefits and lack of investment diversity. In addition, a number of publicly traded companies have seen the filing of fiduciary liability claims shortly after a shareholder lawsuit, especially when the company has its own stock as an investment option under a retirement plan.

Coverage is written on a claims made policy form, and many carriers will write the coverage either on a stand-alone basis or in conjunction with the Directors’ and Officers’ Liability Coverage. Premiums are rated primarily on the size and types of plans being covered, and the cost can be minimal for many insureds.

In addition, there are two additional types of coverages that are related to Fiduciary Liability:

1. Fidelity Bond – ERISA requires that fiduciaries (and all others that handle plan assets) carry a fidelity (employee dishonesty) bond. This bond protects the plans from dishonesty and fraud committed by the individuals who have access to the plan assets. According to the ERISA, the minimum amount of coverage required is the lesser of $500,000 or 10% of the plan’s total assets.
2. Employee Benefits Liability (EBL) – this type of coverage is added to the Commercial General Liability (CGL) policy. EBL typically only covers administrative errors in handling employee benefit plans (ie. mistakenly canceling an enrollment).

FIDUCIARY LIABILITY CLAIMS EXAMPLES

FIDUCIARY LIABILITY CLAIMS EXAMPLES (LAWSUITS INVOLVING 401(K) PLANS)