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Does Your ERISA Fiduciary Liability Insurance Offer Enough Protection?

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Does Your ERISA Fiduciary Liability Insurance Offer Enough Protection?
The Employee Retirement Income Security Act of 1974, as amended (“ERISA”) does not explicitly require that fiduciaries carry fiduciary liability insurance. However,given the risks taken by fiduciaries, the insurance may be considered money well spent. In fact, plan administrators and others may consider the existence of fiduciary liability insurance before hiring a service provider for their plan. In this article, we will explore the importance of ERISA fiduciary insurance.

What Are ERISA Fiduciaries?

A fiduciary is a person or entity with control or authority of plan assets, as well as administrators and those who provide investment advice to the plan. ERISA sets out fiduciary responsibilities, which includes:
  • Acting in the best interests of plan participants and their beneficiaries;
  • Fulfilling obligations in a prudent manner;
  • Acting in compliance with plan documents that are consistent with ERISA;
  • Using strategies that diversify plan investments, which may reduce the risk of loss; and
  • Allowing only reasonable plan expenses.
Every plan has at least one fiduciary. Sometimes this can be an entity, like a board of directors or committee, instead of an individual. The plan fiduciaries may be one or more of the following: members of a plan administration committee, investment and financial advisers, trustees. Others may work on the plan, but not in a fiduciary capacity. The key is whether the individual exercises any control or discretion over the plan assets or administration.

Why Do Fiduciaries Need ERISA Fiduciary Insurance?

It should be noted upfront that an ERISA fidelity bond is not fiduciary insurance. A fidelity bond protects the plan while the insurance protects the fiduciaries. In 2017, the Employee Benefits Security Administration (EBSA) oversaw almost 681,000 retirement plans, 2.3 million health plans, and other benefit plans. Total assets for the plans exceeded $8.7 trillion as of October 2, 2015. Fiduciaries are responsible for proper management of these funds. Fiduciaries of ERISA-qualified plans carry the heavy burden of managing other people’s money. Workers and employers who contribute to these plans trust fiduciaries to act prudently and in their best interests. However, sometimes things go wrong, and fiduciaries may be held liable:
  • When excessive fees reduce the value of the plan;
  • When incompetent service providers are hired;
  • If risky investments cause insolvency or reduced benefits; and
  • When employees invest their 401(k) funds in a company that becomes insolvent.
Fiduciaries may be held personally liable for plan losses. ERISA fiduciary insurance can protect against such losses.

How Much ERISA Fiduciary Insurance is Enough?

Many fiduciary liability insurance policies have a “deteriorating defense clause” which means the insurance company decreases your personal liability exposure coverage by the amount used to pay for your defense. Your protection starts with having ERISA legal counsel to work with you to implement a comprehensive fiduciary compliance strategy. At Hall Benefits Law, we work extensively with plan administrators and sponsors to mitigate fiduciary liability exposure by having protections, such as fiduciary liability insurance, in place before a fiduciary breach claim occurs. We work with plan sponsors to understand the scope of protection offered in a fiduciary liability insurance policy and the recommended levels of fiduciary liability insurance coverage. We help our clients both avoid and defend against ERISA claims—including fiduciary, ESOP, health and welfare benefit and retirement plan claims. Please call 678-439-6236 to discuss your concerns with an experienced attorney. Our website contains more information about our firm, a Contact Form, and free resources for your review. From our home office in Georgia, we assist clients throughout the United States, from New York to California.
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