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The Must-Have Coverage for Plan Sponsors: Fiduciary Liability Insurance


 The Must-Have Coverage for Plan Sponsors Fiduciary Liability InsuranceEmployee benefit plan vendor selection and compensation arrangements made by an employer or union, association or other employee benefit plan sponsors, fiduciaries and service providers are coming under increasing scrutiny by the Employee Benefits Security Administration (EBSA). While the Employee Retirement Income Security Act of 1974 (ERISA) technically grants plan sponsors and fiduciaries wide latitude to execute these choices, the exercise of these powers also comes with tremendous responsibility. ERISA, among other things, requires that fiduciaries exercising discretion over these and other plan matters:

  • Act prudently for the exclusive benefit of plan participants and beneficiaries;
  • Not involve the plan or its assets in any arrangement that is listed as a prohibited transaction under ERISA § 406; and
  • Not act for the benefit of themselves or any third party.

These responsibilities are in effect whenever a company or individual is either named as a fiduciary or in fact possesses or exercises discretionary responsibility or authority over plan investments, assets, administration or other fiduciary matters, including but not limited to the selection of fiduciaries and service providers, investments or expenditures of funds or other discretionary matters. Since the earliest days of ERISA, the EBSA as well as private plaintiffs have aggressively enforced these and other fiduciary responsibility rules.

Moreover, in July 2012, the Department of Labor (DOL) issued a ruling under ERISA requiring that any service provider for retirement plans covered by ERISA (defined benefit, profit sharing, 401k and some 403(b) plans) provide written disclosures about the services provided to the plan, the direct costs of those services (those paid by the plan) and indirect costs (those paid by any source other than the plan or the plan sponsor). Those disclosures are provided to the plan sponsor (the employer) who in turn shares it with plan beneficiaries (employees). The rule also required that plan beneficiaries be provided with investment-related information in a chart or similar format designed to facilitate a comparison of each investment option available under the plan.

The failure to fully execute the fiduciary duties ERISA imposes upon employers and administrators can lead to significant liability exposure. Claims made against fiduciaries can include allegations of a variety of mistakes in judgment. The most frequently alleged claims include:

  • Administrative errors
  • Paying excessive administrative fees
  • Paying excessive investment management fees
  • Cash balance plan conversions
  • Civil rights denial or discrimination
  • Denial or change of benefits
  • Failure to adequately fund a benefit program
  • Failure to monitor the fees and expense paid by the plan
  • Improper advice or counsel
  • Imprudent investment
  • Inappropriate selection of advisors or service providers, such as selecting investments that had higher expenses than other similar and suitable investments with lower expenses
  • Incorrect benefit calculation

To avoid these types of claims, employers should seek out the involvement of an independent, conflict-free advisor to review and make plan recommendations. In addition, having a robust Fiduciary Liability insurance plan in place is critical in the event of a lawsuit. This policy is designed to protect the personal assets of company fiduciaries (trustees, benefits administrators) in addition to the financial assets of the company and employee benefit plans against lawsuits alleging plan mismanagement, and improper investing, insufficient funding, among others. There are also policy forms available to cover voluntary compliance programs, settlor and other non-fiduciary claims, and regulatory penalties, such as HIPAA fines.

Axis Insurance Services offers Fiduciary Liability insurance and is available to provide a full risk analysis to ensure your coverage needs are being met. Just give a call at (877) 787-5258.

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Blogged on: February 22, 2016 by Mike Smith
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