A case brought by the DOL against the president of an investment firm for fiduciary breach under ERISA points out dilemmas that members of a defined contribution (DC) plan like a 401k can face. If a strong willed senior manager, especially the president, forces the DC plan to make obvious imprudent investments, such as in investing in so-called “penny stocks”, what’s the liability of committee members who act as the plan’s fiduciary?
In the DOL’s case against Fort Orange Capital Management, the president invested substantially all of the profit sharing plan’s assets in a penny stock that the president had also personally invested in. The stock ultimately plummeted resulting in a 96% loss.
The DOL alleged fiduciary breaches under ERISA including violation of:
- Prudence
- Loyalty
- Diversification
- Sole benefit rule
The issue of damages is still under review.
At a TPSU program in 2016, a member of a company’s 401k committee and co-fiduciary on the plan was uncomfortable because the president of the firm was pushing a mutual fund run by a friend to be included in the plan’s line up. The co-fiduciary was not sure the investment was appropriate or met the plan’s Investment Policy Statement (IPS) but was unsure what to do.
Short of going to the DOL and risk losing her job, the co-fiduciary could have indicated on the record that she was opposed to the investment. More and more plans are turning to fiduciary liability insurance for members of a DC plan’s committee to cover lawsuits and fines – under ERISA, personal assets can be at risk for certain violations.
Some plan sponsors think that because they have a fiduciary bond that they are covered but there is big difference between what the bond covers, which is required, and what is covered under fiduciary liability insurance. Most general liability and Directors and Officers insurance policies excludes claims under ERISA. Along with protection from lawsuits, fiduciary liability insurance covers:
- Denial or change (especially reduction) of benefits.
- Administrative error.
- Improper advice or counsel.
- Wrongful termination of a plan.
- Failure to adequately fund a plan.
- Conflict of interest.
- Imprudent investment of assets or lack of investment diversity.
- Imprudent choice of insurance company, mutual fund, or third-party service provider.
Watch a video of a 401k committee member who got fiduciary insurance for added protection.
