Fiduciary Liability

Date Posted: 8/2/2013 1
Author: Kim Wilson

In response to abuses in the operation of private pension plans, Congress passed important employee benefit legislation, specifically the Employee Retirement Income Security Act of 1974. This is now commonly referred to as ERISA. ERISA regulates most types of benefits that an employer provides. This law was designed to protect the rights of participants and beneficiaries in employee benefit plans. As a way to protect the rights of the employees, ERISA created strict standards of conduct for fiduciaries of plans that fall under ERISA control. Some of the plans that are subject to ERISA regulations include:
  • Pension Plans
  • Profit Sharing Plans
  • Savings Plans such as 401k or 403b plans
  • Employee Stock Ownership Plans
  • Welfare Plans such as life insurance, medical insurance, and disability insurance;

  • ERISA’s definition of an employee benefit plan is very broad and can include most plans, funds, or programs set up for the purpose of providing employee benefits to its participants and beneficiaries. Most employers today have one or more plans for their employees that fall under ERISA. Who are the fiduciaries of these plans? Under ERISA one becomes a fiduciary if you:
    • Are named in the Plan Document or are identified as a fiduciary by the sponsor of the plan;
    • Exercise any discretionary authority or discretionary control with respect to the
    • management, administration, or disposition of plan assets;
    • Provide investment advice for a fee or other compensation.;

    • ERISA requires that any fiduciary assume personal liability in connection with the management and administration of these plans. In other words a fiduciary’s personal assets (bank account, personal investments, etc) are at risk. ERISA renders fiduciaries personally liable if they breach any of the responsibilities, obligations or duties imposed upon them under the law. Some of the more critical duties imposed on fiduciaries include:
      • Acting exclusively for the benefit of plan participants
      • Prudent person rule
      • Investment diversification
      • Monitoring performance of investments as well as outside professionals
      • Adherence to the plan document
      • Understanding the complexities and nuances of ERISA
      • Understanding operational and reporting rules of other regulatory bodies such as the Internal Revenue Service and the Department of Labor;

      • Unfortunately, under ERISA, the Plan cannot relieve fiduciaries from personal liability or responsibility brought on by ERISA imposed duties. Under the law, a fiduciary can also be held liable for the acts of a co-fiduciary. This means that the plan sponsor and individual fiduciaries can be subject to claims that arise out of the actions of various organizations that provide services to the Plan. These can include consulting firms, professional administration firms, investment management companies, accounting firms, law firms, etc.

        Fiduciaries remain ultimately responsible for the management and administration of the employee benefit plans and consequently, can never fully insulate themselves from personal liability nor transfer responsibilities for compliance to someone else. However, fiduciaries can take prudent steps to reduce their personal liability exposure by :
        • Staying abreast of responsibilities under ERISA and governing bodies;
        • Hiring a complete team of knowledgeable advisors;
        • Purchasing Fiduciary Liability Insurance;

        • Although ERISA specifically prohibits the Plan from relieving fiduciaries of ERISA imposed liability, the Plan, its fiduciaries or sponsoring employer may purchase insurance to cover liability for negligence. Fiduciary Liability Insurance offers protection for both plan fiduciaries and the company sponsoring an employee benefit plan. Fiduciary Liability Insurance protects fiduciaries for sums they are legally obligated to pay as a result of an actual or alleged wrongful act or breach of their fiduciary duties. This insurance also provides coverage for defense expense to defend a claim made against fiduciaries for an actual or alleged wrongful act. The high cost of legal defense against a suit and the financial hardship an adverse decision would bring could be a financial disaster for many persons serving as fiduciaries. With increasing scrutiny of agencies such as the Department of Labor as well as the increasing amount of litigation in our society, it is important to consider Fiduciary Liability Insurance to protect both personal and business assets.