Should plan sponsors carry fiduciary insurance?
With all the talk about the DOL’s fiduciary rule along with the rash of 401k lawsuits, committee members of defined contribution (DC) plans like 401ks and 403bs are more aware of liability for the company. But an HR professional at an international travel company with 225 employees in the US attending a TPSU program held at USC in Los Angeles asked about her personal liability and those of the company’s Investment Committee also attending.
Serious violations of ERISA which govern 401k and some 403b plans can result in personal liability of plan fiduciaries piercing the corporate veil. So many plan sponsors are considering fiduciary insurance to protect against lawsuits, liability and fines. It seems only fair for the company to insure employees acting as plan fiduciaries especially with costs relatively low.
Many plan sponsors mistake their fidelity bond for fiduciary insurance.
ERISA requires companies have a minimum of $1,000 fidelity bond to protect against fraud which represents 10% of assets handled by participants with a maximum of $500,000 unless company stock is offered with the max at $1 million. One of the top errors found in the 5500 form according to the IRS is inadequate fidelity bonds.
Fiduciary insurance, on the other hand, can cover:
- Fiduciary breaches that might stop short of fraud;
- Cost of litigation;
- Defense of regulatory investigations;
- Regulatory penalties;
- Cost of voluntary corrections; and
- Administrative errors
Other lessons learned by the HR professional attending TPSU:
- Benefits of auto escalation
- Cost of older employees wanting to retire but cannot because they did not save enough compared to younger workers
Plan sponsors should work with their plan advisor and insurance broker to determine costs of fiduciary insurance immediately. Learn more about how a company that includes rank and file workers on their committee got insurance to protect them.
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