Liability under ERISA, which covers defined contribution (DC) plans like 401(k)s, imposes the highest fiduciary responsibility under law in the world which rightfully scares many companies that sponsor a retirement plan. There is protection in the form of fiduciary liability insurance but many plan sponsors don’t have it because they think they are covered under the company’s other insurance policies or that it’s too expensive.
At a TPSU program held at Valparaiso University, a plan committee member attending the program from a larger Midwest manufacturer explains why his company obtained fiduciary liability insurance and the process they used. The plan sponsor had previously re-formed their investment committee to include mid-level and line workers. After their newly hired plan advisor explained the committee members’ fiduciary liability which could reach to personal assets, the committee decided to look into the insurance. The process was quite painless using the company’s insurance broker and relatively inexpensive providing relief for committee members concerned not just about corporate exposure but personal liability as well.
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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.
Before you think you don’t need it, watch the video from another attendee at a TPSU program who had improperly excluded part-time workers and is not facing serious fines and penalties. It’s only prudent to speak to your plan advisor about fiduciary liability insurance and see if the cost is worth it – your committee members will appreciate it.
