Closing the Liability Gap
When it comes to fiduciary liability, ignorance is risk. Many fiduciaries of company-sponsored retirement and health plans are unaware that they face significant exposures in connection with their duties.
A Travelers survey provides evidence of this “awareness gap.” More than 250 insurance professionals surveyed said that more than half of their clients (54 percent) generally do not understand if they have a fiduciary duty. When asked to name the top three reasons clients do not purchase fiduciary liability coverage, nearly 80 percent said, “Clients do not feel like there is an exposure.”
Many of those clients may be mistaken. Under the Employee Retirement Income Security Act of 1974 (ERISA), anyone who has responsibility for managing employee benefit plan assets or has discretionary responsibility for a plan’s administration is considered a fiduciary. Further, fiduciaries face personal liability, meaning their own assets could be at risk, for any breach of the responsibilities, obligations or duties imposed upon fiduciaries by ERISA.
Such liability can be expensive. Consider the $35 million judgment awarded by a Missouri federal district court, in Tussey v. ABB Inc., 2012 WL 1113291 (WD MO 2012), against fiduciaries of a private company’s 401(k) plan for numerous violations of ERISA, including a failure to monitor recordkeeping fees, causing the plan to pay excessive fees, and a failure to comply with the plan’s governing documents.
Too many fiduciaries are operating without the knowledge they need to protect themselves, the survey results indicate. While agents are in a prime position to help educate and protect their clients with insurance solutions, they need to be proactive. Less than half of agents and brokers surveyed (46 percent) are offering quotes for fiduciary liability protection. Of those who do, however, nearly half of clients purchased coverage, demonstrating a high level of receptivity.
Fiduciary liability insurance typically protects a company, its benefit plans, and its directors, officers and employees from litigation involving actual or alleged mismanagement breach of fiduciary duty and/or negligent administration of employee benefit plans. The top benefit, according to 68 percent of those surveyed, is that it covers the legal costs of defending the claims.
Legal and Financial Exposure
While agents may understand the risks of being a fiduciary and the coverage benefits, they need to communicate that information to clients and prospects. They can begin by ensuring that clients understand their potential legal and financial exposure.
In 2011, the Department of Labor collected $1.38 billion in cases involving ERISA claims. Three-quarters of the 3,472 closed investigations included a monetary recovery. In a Towers Watson survey of organizations that experienced a fiduciary liability claim, the average settlement was $994,000, with average defense costs reaching $365,000.
Agents also can provide in-depth information and dispel myths. Of course, agents may need to first brush up on their knowledge to become better advisors and salespeople. Forty-five percent of survey participants said “helping me better understand exposures” was one of the top three ways insurers could help increase fiduciary liability sales.
Other options include seeking out a provider who can be a partner in advising and supporting clients, taking a class or finding a specialist who can train multiple people at their agency. Another option includes looking at compelling claims examples. One-third of survey respondents said providing claims examples are the No. 1 supporting item needed to sell more coverage.
Examples of actual claims are very effective in demonstrating the types of situations fiduciaries might encounter, illustrating the importance of managing fiduciary risk or showing the often-high costs of lawsuits.
In one case involving a manufacturing company, the Department of Labor alleged that the trustees of an Employee Stock Ownership Plan (ESOP) violated ERISA by the sale of non-publicly traded stock from the ESOP at a price below fair market value. It cost about $800,000 to resolve the matter.
Risk Landscape
Agents also can share with their prospects and clients the following points, which help to illustrate the fiduciary risk landscape.
Plaintiffs often prevail: ERISA lawsuits are prevalent, expensive and frequently won by plaintiffs.
Reliance can be risky: There are residual duties and potential liabilities associated with reliance on the services of outside investment managers.
“Unsafe” Harbors: ERISA section 404(c)’s “safe harbor” protections require more than offering a diverse selection of mutual funds, and the protections aren’t as broad as some think.
Focus on 401(k) plans: The Department of Labor and Internal Revenue Service are showing signs of greater interest in ensuring 401(k) plan compliance.
Exposures go beyond investment choices: Imprudent investing is not the only exposure of ERISA plan fiduciaries.
Workplace volatility adds perils: Employer’s exposure to ERISA lawsuits may be increased by employee layoffs, terminations and benefit plan changes.
Follow the Code: Failure to comply with the employee benefit plan provisions of the Internal Revenue Code can be costly.
The right insurance is critical: Unlike fiduciary liability insurance, most forms of insurance, including employee benefits liability and ERISA fidelity bonds, do not cover liability for breach of fiduciary duty under ERISA.
With the challenges facing fiduciaries today, agents and other insurance professionals have an important role to play in raising awareness, promoting education and providing the right insurance solutions in an area that’s often poorly understood.