Fiduciaries of employee benefit plans—including for small businesses—are potentially subject to lawsuits alleging they mismanaged or improperly administered those plans. Such claims may be filed by disgruntled plan participants or their beneficiaries. In recognition of this, employers can protect themselves and other plan fiduciaries by purchasing fiduciary liability insurance.
Obligations Under ERISA
Benefit plan fiduciaries are governed by a federal law called the Employee Retirement Income Security Act (ERISA). Enacted in 1974, ERISA sets minimum standards for retirement and health plans that are offered by private employers. The law holds fiduciaries to a very high standard, making them personally liable for their actions. This means that their personal assets may be used to pay damages awarded to claimants.
ERISA requires each benefit plan to have at least one fiduciary, who must be identified in the plan by name or position.
ERISA applies to any plan that meets the law's definition of an employee benefit plan. This term includes employee welfare plans such as medical, dental, and disability plans, and flexible spending accounts (FSAs). It also includes retirement plans like 401(k)s, pension, and stock purchase plans. ERISA doesn't apply to group health plans established by churches or governmental entities, or to plans required by law, such as worker’s compensation and unemployment compensation plans.
Who Is a Fiduciary?
ERISA defines the word “fiduciary” in detail. Essentially, a fiduciary is anyone who has discretionary (decision-making) authority over a plan's management, administration, or its assets. Typically, all of the following roles qualify as fiduciaries: the plan sponsor (employer), the plan trustee, the plan administrator, the firm's directors and officers, and the firm's internal investment committee.
If a person's job involves working with employee benefits, that doesn't necessarily make them a fiduciary. Employees who perform routine administrative functions also aren't fiduciaries. Examples of these types of positions are workers who maintain employment records, calculate benefits, or determine eligibility for benefits based on existing rules.
A fiduciary cannot absolve themselves of liability by delegating their duties to someone else, like an outside administrator.
Likewise, an employer isn't necessarily acting as a fiduciary when making benefit-related decisions. For instance, an employer is not considered a fiduciary when deciding whether or not to offer a plan, what benefits to include, or whether to change or terminate a plan. These are business decisions; not fiduciary. However, an employer may become a fiduciary when implementing these decisions on behalf of a plan.
Examples of Claims Coverage
Obtaining fiduciary liability insurance for those in your business who need it can be a wise financial move. Here are a few examples of the possible types of costly, time-consuming claims that are covered by fiduciary liability insurance:
- A business hires a third-party investment manager to make investment decisions on behalf of the company's 401(k) plan. The manager invests the funds in a Ponzi scheme and the money is lost. Plan participants sue the employer for hiring a dishonest manager and failing to monitor it.
- A business offers a benefit plan and stores related sensitive employee data, such as Social Security numbers, on its computer system.The system is hacked, and employees sue the business for breaching its fiduciary duties.
- An employer offers health insurance benefits to workers through an insurance company. An employee submits paperwork to add his newborn child to the plan, but the employer neglects to notify the insurer. When the health insurer later refuses to cover medical expenses incurred by the child, the worker demands that the employer pay the bills.
Fiduciary Liability Coverage
A business of any size that offers employee benefits should consider purchasing fiduciary liability insurance; This coverage is widely available. Examples of fiduciary liability policies are those offered by Hartford, Travelers, and Beazley. Hartford and Travelers are large multiline insurers, while Beazley is a specialty carrier.
Fiduciary liability policies are claims-made, meaning they cover claims made during the policy period. They cover claims filed against plan fiduciaries for breach of their fiduciary obligations in the management or administration of an employee benefit plan. Policies typically cover acts like those listed below:
- Wrongful denial of benefits
- Making improper changes to a benefit plan
- Making errors in the administration of a benefit plan
- Providing improper advice or counsel
- Negligent selection of third-party service providers or failure to supervise their activities
- Negligent investment of plan assets
- Conflicts of interest, such as giving advice that benefits the fiduciary rather than the plan participant
Be aware that fiduciary liability insurance does not cover crimes or other acts of intentional wrongdoing such as embezzlement.
Some of these policies do include a limited amount of coverage (such as $100,000) for fees and legal defense expenses paid under a government-sponsored settlement program. Settlement programs enable employers to avoid costly litigation by settling claims out of court.
While fiduciary liability policies cover the cost of defending claims, legal defense costs are subject to the limit. Moreover, policies often include a deductible, which may apply to both damages and defense costs.
Fiduciary liability may be purchased alone or as part of a management liability package policy.
How Much Can It Cost?
Most insurance companies that offer fiduciary liability coverage don’t post prices on their websites. Nevertheless, business owners can estimate their cost of coverage using data provided by Embroker, an online insurance brokerage. Embroker indicates that annual fiduciary liability premiums generally range from $500 to $2,500 depending on the specific needs of a company.
Fiduciary vs. EBL Coverage
Most fiduciary liability policies automatically include employee benefits liability (EBL) coverage. EBL insurance covers claims arising out of errors in routine administrative duties like enrolling plan participants and adding or removing beneficiaries. EBL insurance may be provided independently from fiduciary liability via an endorsement to a general liability policy. When provided in this manner, EBL insurance specifically excludes liability arising out of ERISA.
If you offer employee benefits then your benefits plan administrator, investment manager, your company’s own directors, officers, and some others at your firm may qualify as fiduciaries under ERISA. Fiduciaries are held to a very high standard of conduct and are personally liable for their mistakes.
You can protect your business from expensive benefits-related lawsuits by purchasing fiduciary liability coverage.