Like many types of insurance, you may go years paying for premiums and never need to take advantage of the coverage. When insurance is not mandatory, deciding whether to purchase a policy may depend on weighing the costs and benefits. However, when fiduciary liability associated with your company's maintenance of a qualified retirement plan (eg. 401(k) Plan, Profit Sharing Plan, Defined Benefit Plans and ESOPs) puts your personal assets at risk, you may decide that fiduciary liability coverage is worth the cost.
Fiduciary liability insurance protects against claims of breach of fiduciary duties. This duty requires fiduciaries to act solely in the interest of plan participants and their beneficiaries. Any breach could result in costly litigation and government penalties. Unfortunately, litigation could be costly even when the claim has no merit. Fiduciary liability insurance can reduce the costs of fiduciary litigation for businesses and protect personal and company assets. Many policies even cover the cost of Department of Labor investigations.
An example of a fiduciary act that could result in litigation includes the purchase by a Plan Trustee of overvalued company stock by an Employee Stock Ownership Plan (ESOP). There have been a number of recent cases where plan participants have sued business owners for selling the company stock at an inflated price. These have resulted in multi-million dollar awards to ESOP participants for breaches of fiduciary duties.
With so much at stake, fiduciaries should take measures to limit potential liability, including documenting their decisions and following fiduciary best practices. This includes documenting their decision-making process. Other fiduciary responsibilities may include:
- Diversifying investments,
- Avoiding conflicts of interest,
- Defraying the reasonable costs of administering the plan,
- Monitoring investment performance, and
- Following the terms of plan documents.
Under ERISA, there is a fiduciary duty for those who administer, manage, or control plan assets. The fiduciary duty extends to a number of parties, many of whom may not even realize they are bound by fiduciary duties. For companies that sponsor a retirement plan for employees, participation in the management or administration decision making of the plan could mean the employer is acting as a fiduciary.
Fiduciary liability insurance can generally be purchased as a separate policy but in most cases is offered as an additional rider on policies also covering employment practices and Directors and Officers liability coverage. This may provide your company with the right level of coverage for your company's benefits plans.
ERISA requires fidelity bonds for the benefit of the plan or plan beneficiaries who are harmed by dishonest plan administrators or trustees. However, this type of insurance will not protect Plan Administrators or Trustees themselves. This could still result in costly litigation to owners and management.
Employee benefit plan liability policies (also referenced to as ERISA fiduciary liability insurance) may cover other claims involving fiduciary liability, including those related to issues with the administration of the employee benefit plan.
If you have any questions about your fiduciary duties and how a claim could put business and personal assets at risk, the law firm of Butterfield Schechter LLP is here to help. We are San Diego County's largest law firm focusing its law practice on employee benefits law. Contact our office today with any questions on how we can help you and your business succeed.