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Fiduciary Liability Insurance

Company representatives involved in managing pensions, savings, profit-sharing, employee benefits and welfare plans are liable if they breach their fiduciary duties. If this responsibility belongs to you, it is imperative that you understand your responsibilities to avoid potential liability. In fact, fiduciaries that do not follow the basic standards of conduct may be personally liable to restore any losses to the plan, or to restore any profits made through an improper use of the plan’s assets resulting from their actions. Consider Fiduciary Liability Insurance to protect you and your organization against losses associated with fiduciary error. 

Fiduciary Liability Insurance protects fiduciaries against legal liability for claims arising out of their roles. These policies are stand-alone, yet there are several other protections available for organizations wishing to protect themselves:

  • Fidelity bonds are required under ERISA and are designed for safeguarding beneficiaries when administrators or trustees financially harm an employee benefit plan. This bonding insurance is only designed to benefit the plan and beneficiaries and will not protect the trustees from liability claims (the difference as compared to Fiduciary Liability Insurance).
  • Employee Benefit Liability (EBL) insurance covers claims arising out of errors or omissions while administering a benefit plan. EBL does not protect against all fiduciary responsibilities and may be included in a Fiduciary Liability policy. 

In addition to these coverages, similar protection may be adopted using Directors and Officers (D&O) Liability Insurance, Commercial General Liability (CGL) or Trust E&O/Professional Liability coverage with an endorsement covering fiduciary liabilities. 

Limiting Liability

In addition to Fiduciary Liability Insurance, there are additional ways to limit your liabilities, such as documenting the processes used to carry out their fiduciary responsibilities. Here are some other ways to limit your liability:

  • Some plans, such as most 401(k) or profit-sharing plans, can be set up to give participants control over the investments in their accounts. For participants to have control, they must be given the opportunity to choose from a broad range of investment alternatives. Under the U.S. Department of Labor regulations, there must be at least three different investment options so that employees can diversify investments within an investment category, such as through a mutual fund, and diversify among the investment alternatives offered. In addition, participants must be given sufficient information to make informed decisions about the options offered under the plan.
  • Hire a service provider or providers to handle fiduciary functions, setting up the agreement so that the person or entity then assumes liability for those functions selected. If an employer appoints an investment manager that is a bank, insurance company or registered investment advisor, the employer is responsible for the selection of the manager, but is not liable for the individual investment decisions of that manager. However, an employer is required to monitor the manager periodically to assure that it is handling the plan’s investments prudently. 

Who is a Fiduciary?

  • Individuals or organizations who exercise authority or control over the management of an employee benefit plan. Specifically, those responsible for investing, controlling or disposing of assets held by the plan.
  • Entities that service pension plans, such as consulting firms, law firms, accounting firms, professional administrative firms, investment advisors, investment management companies and trust departments of financial institutions. 

What are a Fiduciary’s Responsibilities?

  • Acting solely in the interest of plan participants and their beneficiaries and with the exclusive purpose of providing benefits to them
  • Carrying out their duties prudently
  • Following the plan documents (unless inconsistent with ERISA)
  • Diversifying plan investments
  • Paying only reasonable plan expenses
  • Monitoring investments
  • Avoiding prohibited transactions. 

The duty to act prudently is one of a fiduciary’s central responsibilities under the Employee Retirement Income Security Act of 1974 (ERISA). To minimize your liability, it is wise to document decisions and the basis for those decisions. For instance, in hiring any plan service provider, a fiduciary may want to survey a number of potential providers, asking for the same information and providing the same requirements. By doing so, a fiduciary can document the process and make a meaningful comparison and selection. 

Following the terms of the plan document is also an important responsibility, as this document serves as the foundation for plan operations. Your organization should become familiar with this plan document, especially when it is drawn up by a third-party service provider. In addition, diversification also helps to minimize the risk of large investment losses to the plan. Fiduciaries should consider each plan investment as part of the plan’s entire portfolio. If the plan is not diversified, the burden of proof falls onto the fiduciary to prove why it was not prudent to diversify. In addition to these suggestions, consider doing the following to comply with ERISA:

  • Incur only reasonable costs. Know what you are paying for with regard to total plan expenses and how these costs compare to the market for reasonableness.
  • Monitoring investments involves the implementation of an ongoing program for measuring the results of your plan’s managers for consistency of style, performance against their benchmarks, significant changes in management, etc.
  • A plan’s fiduciary breaches his or her duties by engaging in or allowing the following types of transactions between the plan and a party-in-interest (i.e. a fiduciary or counsel to the plan, persons or owners of corporations providing services to the plan, the employer sponsoring the plan, a relative of a party-in-interest or an employee organization whose members participate in the plan):
    • Selling, exchanging or leasing of property
    • The lending of money
    • The furnishing of goods and services
    • The transferring or use of plan assets for the benefit of a party in interest
    • The acquiring or holding of an employer securities or employer real property in violation of ERISA 

Protecting your fiduciary duties can be quite complicated; let Chadler Solutions guide you through the process. Contact us today to learn more.

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