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Fiduciaries Beware - Your Personal Assets Are At Risk

Did you know that individuals who administer employee plans, fiduciaries and trustees, are subject to personal liability under ERISA, the federal law that governs employee benefits? Even with a participant-directed 401k plan such as those offered by the Fidelity’s, T. Rowe Price’s and Schwab’s of the world, plan fiduciaries can still be held liable for a variety of reasons. The selection of plan investment options, monitoring those investments, and educating those employees of their options are all reasons which potentially leave the fiduciary’s personal assets vulnerable. Further, contrary to common assumptions, plan fiduciaries cannot transfer their responsibilities to another party, such as an insurance company, professional investment firm, or third party administrator (TPA). Of course, steps could be taken to reduce the personal liability, such as hiring a competent team of experts, but ultimately the fiduciary remains responsible for the management and administration of the benefit plan.

Defending claims can be expensive and very time consuming. According to the Tillinghast 2003 Fiduciary Liability Survey Report, the average cost of paid claims was $994,000. Defense costs made up a significant portion of overall fiduciary liability losses. In fact, the average reported defense cost for claims from U.S. participants in the study was approximately $365,000. When you consider the cost of defending a suit and the possibility of a settlement or judgment, you may ask yourself how can a company afford not to buy fiduciary liability insurance?

The first insurer to effectively market fiduciary liability insurance was Aetna Casualty & Surety Co., now absorbed into St. Paul Travelers Group. Other prominent insurers offering this coverage would include Chubb, AIG, Zurich, Ace, Aegis, CNA and XL. Pricing for fiduciary liability insurance is based upon individual benefit plan assets, annual contributions, past loss experience and funding practices of employers.

What Could Possibly Lead To A Claim?

So you say you manage your benefit plans pretty well, do you? Take a look at some examples of claims scenarios I found on one carriers product brochure marketing Fiduciary Liability Insurance protection.

	FIDUCIARY LIABILITY CLAIM EXAMPLES
$1,500,000	A company was sued by a group of participants in an employee stock ownership plan (ESOP), alleging improper valuation of the company’s stock, which was not publicly traded. A significant shareholder of the corporation had sold his shares back to the company the prior year at a price that was determined to be fair by the trustees of the ESOP. The participants alleged that the stock was grossly overvalued in order to effectuate the buy out of the major stockholder. The stock was re-valued a year later and was found to be worth significantly less on a per share basis than what was paid out to the previous stockholder. The lawsuit settled for $1.5 million.
$350,000	Two employees approaching retirement age discovered they hade never enrolled in the company’s 401(k) plan. The employees sued the company and plan trustees alleging the plan administrators failed to properly advise them how to enroll and enrollment was not automatic. The value of the alleged lost benefits exceeded $150,000 and defense expenses were in excess of $200,000.
$440,000	Trustees of a profit sharing plan were accused of improperly concentrating plan investments in a single industry and limited number of stocks. The plan fiduciaries were found to have breached their fiduciary duties by failing to diversify the plan’s investments. Damages were $320,000 and legal fees were $120,000.
$1,250,000	A group of employees alleged that the newly selected outside plan administrator improperly delayed transferring fund balances in the plan from one investment option to another, as directed by the participants. Subsequently, the employees sued the plan trustees to recover more than $1 million in lost investment income. Defense expenses amounted to $250,000.
$120,000	Due to a miscalculation by plan fiduciaries, the plan was under-funded and benefit payments were incorrect. The Department of Labor found plan fiduciaries had breached their fiduciary duties and assessed a 502(l) penalty against them for which they were personally liable in the amount of 20 percent of the recoverable funds.
$550,000	Trustees of six plans were accused of improperly investing plan assets in a residential real estate development loan that defaulted. The trustees were found to have failed to evaluate the borrower’s creditworthiness and determine the economic feasibility of the project. Damages and defense costs totaled $550,000.
$600,000	Fiduciaries of a 401(k) plan failed to notify retirees of a blackout period that occurred to accommodate a switch to a new administrator. The retirees were unable to change their investment options during that period and brought suit claiming that had they been notified they would have moved their funds prior to the blackout. The settlement was $600,000.
$530,000	Participants of a health plan sued the plan’s trustee alleging that the trustee did not monitor the performance of its third party administrator (TPA) and paid excessive fees. Damages and defense expenses totaled $530,000.

Plan Sponsors Often Turn To Fiduciary Liability Insurance For Protection - But Not All Fiduciary Liability Insurance Policies Are The Same

When fiduciaries are researching policies and coverages, there are a number of factors that can measure the integrity of coverage being afforded by a specific policy. Here are just a few of many important contract components which protect the fiduciary:

• Definition of Employees - includes in-house general counsel, volunteers, full-time, part-time, temporary and seasonal workers
• Broad Definition of Subsidiary – definition of Subsidiary includes majority corporations, partnerships, limited liability companies and 50% owned joint ventures under management control of Named Insured
• Marital property extension
• Foreign Parent Corporation Coverage Extension
• Spousal and Domestic Partner Liability
• Settlement Fees Coverage – with respect to any voluntary compliance resolution program administered by the Internal Revenue Service or the Department of Labor
• Claim includes fact-finding investigation by the Department of Labor or the Pension Benefit Guarantee Corporation as well as written respect to toll or waive statute of limitations
• Coverage for merged, terminated and sold plans
• Defense Option – option to select Duty to Defend or Reimbursement coverage at policy inception
• Duty to Defend – 100 percent pre-determined allocation to Defense Expenses for Claims against any Insured consisting of Loss that is and is not covered by policy
• Additional Defense coverage - Option to select additional defense Limit of Liability. Survives exhaustion of base Limit of Liability
• Duties in the Event of a Claim – only triggered by knowledge of an Executive Officer
• Non-Cancelable by Insurer – except in the event of non-payment of premium

As we can see from the above coverage provisions, there are significant aspects to insuring that the fiduciary is properly protected. For information on further coverage components which would no doubt be critical when researching fiduciary liability insurance, please contact Paul Squassi at Resource Group at 800-279-1433 ext. 201. You may also contact Paul at info@MyInsuranceRep.com.

Important Note: Availability of coverage referenced in this document can depend on underwriting qualifications and state regulations.

Fiduciaries interested in further information regarding Fiduciary Liability insurance or other forms of Executive Liability protection (such as Directors and Officers Liability; Employment Practices Liability; Crime; Miscellaneous Professional Liability; Kidnap and Extortion for Ransom; Identity Fraud Expense Reimbursement, etc.) should contact their insurance representative. If you do not have an insurance representative and would like to discuss Fiduciary Liability coverage for your business, you may contact Paul Squassi of Resource Group at info@MyInsuranceRep.com.

For More Information About Fiduciary Liability Insurance see:

Fiduciary Liability Basics
http://www.irmi.com/Expert/Articles/2001/Larsen07.aspx

Fiduciary Liability: Obtaining Effective Insurance
http://www.insurancejournal.com/magazines/midwest/2005/02/21/features/52285.htm

Legal: Do You Need Fiduciary Liability Insurance?
http://www.detroitchamber.com/detroiter/articles.asp?cid=7&detcid=451

The information contained on this website is general to the subject matter. Coverage depends on the facts and circumstances involved in the claim or loss, all applicable policy or bond provisions, and any applicable law. Availability of coverage can depend on underwriting qualifications and state regulations.

 

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