"Employee sues employer for not offering employee options for investing in 401K plan."

FIDUCIARY LIABILITY: Protecting Pension and Personal Assets

Unprecedented liability for fiduciaries who manage employee benefit plans was created with the passage of the federal Employee Retirement Income Security Act of 1974 (ERISA). To protect the interests of plan participants and their beneficiaries, ERISA defines the liabilities and responsibilities associated with the management and administration of an employer's health and welfare, pension, profit sharing and other employee benefit plans.

Enactment of ERISA was only the first step in pension reform. Since its passage, a number of additional laws have supplemented ERISA to further protect the innocent and penalize the guilty For example, the Consolidated Omnibus Budget Reconciliation Act (COBRA) and the Retirement Protection Act of 1994 create additional compliance obligations for fiduciaries. Furthermore, the increase in employee stock ownership plans (ESOPs) creates significant liability for fiduciaries.

In recent years, corporate America has witnessed an increase in the number of claims alleging ERISA violations and the costs associated with these claims. The average indemnity payment has increased over 22 percent, from $715,000 to $875,0001, and the average defense expense has gone up 471 percent, from $70,000 to $400,000.

While insurance may protect the financial assets of a company and its fiduciaries from claims, an effective loss prevention program can reduce the potential for those claims.

11994 Wyatt Fiduciary Liability Survey

What is a fiduciary?
A fiduciary is any party who exercises discretionary authority or control over the management or administration of an employee benefit plan or its assets. Fiduciaries include a plan's sponsor, trustees, employees and administrator, as well as directors of a company to the extent they perform fiduciary functions. These individuals can be specifically designated as fiduciaries or they may be deemed fiduciaries by their conduct.

Why are fiduciaries at risk?
ERISA established strict standards of fiduciary conduct. A fiduciary must act solely in the best interests of plan participants and beneficiaries. A fiduciary is required to exercise care, skill, prudence and diligence in the management of an employee benefit plan. A fiduciary who breaches any of the responsibilities, obligations or duties set forth in ERISA is personally liable to compensate the plan for any resulting losses. In addition, the fiduciary must restore to the plan any profits gained through the misuse of plan assets. If a co-fiduciary commits a breach, the other fiduciaries can be liable if they conceal or fail to correct the problem.

What are examples of allegations of breaches of fiduciary duty?

• Failure to adequately diversify plan assets.
• Failure to discharge duties in accordance with the plan documents.
• Self-dealing transactions, such as using plan assets for personal gain or acting on behalf of parties whose interests are adverse to the plan.
• Allowing transactions between the plan and parties in interest, such as permitting the use of plan assets by a person who provides services to the plan.

Who is responsible for enforcing ERISA?
Several federal agencies enforce ERISA. The Department of Labor is responsible for the enforcement of fiduciary rules, reporting and disclosure requirements. The Internal Revenue Service is responsible for those provisions of the law regarding tax treatment of plans and contributions. The Pension Benefit Guaranty Corporation (PBGC) administers a government insurance program for terminated underfunded pension plans.

Who can sue fiduciaries?

• Plan participants(employees) and their beneficiaries, who are likely to sue for recovery of benefits or enforcement of their rights under ERISA.
• The Department of Labor, to stop acts that violate ERISA and to collect civil penalties for prohibited transactions.
• Third-party administrators.
• The Pension Benefit Guaranty Corporation.

What are common fiduciary liability claims?

• improper denial of benefits
• failure to adequately fund a plan
• conflict of interest
• improper advice or counsel
• improper change in benefits
• improper amendments to the plan document
• imprudent investment
• administrative error
• misleading representation
• lack of investment diversity
• improper termination of a plan
• incorrect benefit calculation
• unacceptable choice of insurance company, mutual fund or third-party service provider (investment manager, actuary).

What coverage is provided under Chubb’s fiduciary liability policy?
Chubb's fiduciary liability policy provides coverage for two broad areas:

• Breach of fiduciary duty: Violations of the responsibilities, obligations or duties imposed upon fiduciaries by ERISA, federal or state common or statutory law, or the law of any other jurisdiction in the world.
  
  
• Employee benefits liability: Liability arising out of negligence, errors or omissions in the administration of any employee benefit plan.

Doesn’t my general liability policy’s coverage for employee benefits liability policy provide me with this type of coverage?

• Not really. You can expect two types of claims: errors in plan administration and ERISA breaches (typically by some type of mismanagement). ERISA breach exposure is by far the more expensive and complex. Employee benefits liability coverage only protects you against claims of errors in plan administration, and not the more expensive and complex ERISA violation claims.

Who is insured under Chubb’s fiduciary liability policy?
The policy covers the sponsor organization, any benefit program and any natural person serving as a past, present or future trustee, director, officer or employee of the sponsor organization or sponsored plan.

What are some key advantages of the Chubb fiduciary liability policy?

• $25,000,000 limits of liability available.
• Duty-to-defend policy and use of defense counsel with specific expertise in ERISA law.
• Coverage written on a claims-made basis with retroactive coverage available for most accounts.
• Severability of warranty and exclusions: no knowledge possessed by or fact pertaining to one individual insured will be imputed to another insured to determine if coverage is available.
• Changes in exposure are addressed in the policy. For example, if a new plan is created or acquired (except for an ESOP), coverage is automatically afforded from the date of that event for wrongful acts after the date of the event. Or, if the sponsor organization is acquired by another entity, coverage continues for wrongful acts prior to the acquisition date. Additionally, if a plan is terminated, coverage is provided not only for wrongful acts committed before the date of termination but also for wrongful acts committed after the date of termination by those who were insureds at the time of termination.
• Worldwide coverage.

What types of companies should purchase fiduciary liability insurance?
Fiduciary liability insurance is appropriate for any company that sponsors a retirement plan, such as a defined benefit plan, defined contribution plan, profit sharing plan or ESOP, or welfare plans, such as health and accident plans. Regardless of the size of the company or the number of plan participants, if a company sponsors any of these plans, the company should have fiduciary liability insurance.

What is required to get a free quote?
Chubb requires a completed application, the annual report of the sponsor organization (if available), a copy of the most recently filed 5500 form, and the most recent audited financial statements for all ERISA plans except health and welfare plans.

FIDUCIARY LIABILITY INSURANCE

From Chubb

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