Hidden Risks

Individual Plan Fiduciaries Subject to Personal Risk

By Jane Hodgson-Maiorano

Employees and companies can derive considerable benefit from health care benefits and profit sharing plans. For companies, offering valuable employee benefits can be a crucial competitive edge to attract and retain talent; for savvy job seekers interested in a position, it maybe the second question they ask after salary concerns.

However, for the employees or board members that administer or manage an employee benefit plan, they may be surprised to find out that they face personal risks as a result of these responsibilities. Human resources employees or those individuals charged with picking the investment options, outside advisors, or providers can face personal liability for losses to a plan as a result of their supposed mistakes, errors, omissions, or breach of their fiduciary duties.

They can be held personally responsible for their investment decisions, such as investment choices or even investment advisement. Typical transactions can lead to simple mistakes when paying or calculating benefits, signing up new members, or transferring employees from an old plan to a new plan.

The law that dictates who’s a fiduciary of a benefit plan or who can be sued is not something many people are familiar with; it’s call the Employee Retirement Income Security Act of 1974 (ERISA). It raises a number of questions, like:

Who is a fiduciary?

Someone who helps administer or who has discretionary authority over employee benefit plans, like profit sharing plans, pension plans, or health and welfare plans.

Who can be sued?

Individual fiduciaries, an employer, and the plans.

What issues can be involved in a lawsuit?

Badly chosen advisors or service providers
Mistakes or negligence in the administration of a plan
Inadequate or imprudent investment options
Inappropriate disclosure or advice
Investments that present conflict of interests
Breach of responsibilities of fiduciary duties imposed by ERISA

Who can bring a suit?

The plan participants, their legal estates, the Department of Labor, or the Pension Benefit Guaranty Corporation all have standing depending on the plan or the circumstance of a complaint.

How can this personal exposure be eliminated?

The simple answer is that it cannot be eliminated. Unfortunately, it can only be mitigated by:

Picking prudent and diversified investments
Selecting advisors and service providers wisely
Putting controls in place to catch administrative errors or miscalculations
Purchasing Fiduciary Liability Insurance Coverage

What protections does Fiduciary Liability Insurance provide?

Fiduciary Liability helps provide protection to plan fiduciaries, employers, and covered plans for legal actions they may face from plan participants, their heirs, or government bodies.

Doesn’t my ERISA fidelity bond cover this exposure?

No. ERISA requires an ERISA Bond be purchased to protect plan assets from theft. These required bonds do not provide protection for the personal liability that plan fiduciaries may encounter.

How much could a claim cost?

The average cost of a paid claim was just under a $1 million coming in at $994,000, with reported defense costs totaling in excess of $300,000.

Most, individuals and companies are not anticipating funding this type of unexpected litigation. These must be paid personally, in cases where a person cannot be legally reimbursed by their company or the plan for their attorney fees or damages.

What coverages should I look for?

Ten coverages to look for from Fiduciary Liability Coverage:

Covered parties should include directors, officers, trustees, and employees of the sponsor company or any covered plan, the sponsor company, and the plans themselves.
No deductible for non-indemnifiable losses.
Duty to Defend coverage.
Defense costs coverage for benefits due allegations.
Expanded coverage for acts involving a breach of the responsibilities, obligations, or duties imposed by HIPAA.
Coverage for fact-finding investigations by the Department of Labor or the Pension Benefit Guaranty Corporation.
Coverage for civil penalties for ERISA sections 502(i) or 502(l).
Coverage for punitive or exemplary damages, and the multiple portion of any multiple damages, where insurable, on a most favorable venue basis.
Broad protection for covered plans, to include even those plans not subject to Title l of ERISA, not including Employee Stock Ownership Plans (ESOPs) and multi-employer plans, which are usually addressed on a case by case basis due to their unique exposures.
A non-cancelable policy, except for non-payment of premium.

Jane Hodgson-Maiorano is vice president/general manager of the NAMIC Insurance Agency. To learn more about or to purchase Fiduciary Liability Coverage, call 800.336.2642 or visit NAMIC Insurance Agency online at www.namicinsurance.com to download Fiduciary Liability application.

Posted: Thursday, May 31, 2007 12:00:00 AM. Modified: Thursday, June 28, 2007 3:48:25 PM.

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