Employee benefit plans are almost a necessity to recruit and retain the best talent these days. But those benefit plans come wrapped with serious challenges and obligations – and serious risks. One of the most potentially costly? Getting hit with a fiduciary liability or employee benefits liability claim resulting from administrative errors or omissions in connection with your employee benefit plan or retirement plan.
The Employee Retirement Income Security Act of 1974 (ERISA) and other laws place strict guidelines on the administration of employee benefit and retirement plans, the duties of fiduciaries, and the responsibilities to plan participants and beneficiaries. And when mistakes are made, they can be financially devastating.
Who qualifies as a fiduciary?
Under ERISA, anyone who has discretionary control over employee benefit plan assets is considered a plan fiduciary. If your company sponsors a retirement or health plan and you’re involved in any way with the management of the plan, you’re likely considered a fiduciary. ERISA defines a plan fiduciary as a person or entity that does any of the following with respect to a retirement plan:
- Exercises discretionary authority or control over management of the plan or its assets
- Renders investment advice for direct or indirect compensation with respect to plan assets
- Has discretionary authority or responsibility in administering the plan
- Is specifically identified in the written plan documents as a fiduciary
And here’s the real kicker: Under ERISA, fiduciaries can be held personally liable for any breach in their fiduciary duties. That means your personal assets are at risk for things such as delaying a transfer of balance, failing to properly monitor investments or failing to provide information.
Consider these hypothetical claim scenarios:
- Two employees nearing retirement discover they have never enrolled in their company’s 401(k) plan. The employees sue the company and the plan trustees, alleging the plan administrators didn’t properly advise them about enrollment and enrollment wasn’t automatic. The value of the alleged lost benefits is over $200,000 and defense expenses top $175,000, putting the total over $375,000.
- A group of employees alleges that a newly selected third party plan administrator improperly delayed transferring fund balances from one investment option to another as directed by the participants. The employees sue the plan trustees to recover more than $1 million in lost investment income. With defense expenses totaling $200,000, that makes it a $1.25 million dollar claim.
Bottom line: if one or more of your employees alleges breach of fiduciary duty – regardless of whether the claim has any merit – defending the claim is going to be expensive and time consuming. And standard D&O policies exclude claims for ERISA violations, so that policy won’t protect you.
The only way to protect yourself from these potentially devastating claims is with Fiduciary Liability and/or Employee Benefits Liability insurance.
Here’s a quick rundown of how they work:
- Fiduciary Liability coverage protects companies; their directors, officers, and employees; and the plans themselves against lawsuits alleging breach of fiduciary duty under ERISA and administrative errors and omissions in connection with such plans. The fiduciary liability policy protects the fiduciary against claims made by both current and former employees, as well as entities such as the Department of Labor, Pension Benefit Guaranty Corporation and the beneficiaries' legal estates.
- Employee Benefits Liability coverage protects against lawsuits alleging errors and omissions in connection with the administration of an employee benefit plan. The employee benefit liability policy is designed to protect the beneficiaries of the plan and the plan itself in the event of administrative errors. But EBL coverage almost always excludes coverage for breaches of ERISA's fiduciary duties.
Which coverage do you need? Contact your Higginbotham commercial lines agent today to find out.