What is fiduciary insurance and why might you want it?
A Q&A with Wendy Von Wald, fiduciary product manager at Travelers, about a form of insurance for companies offering benefits or retirement plans.
Being a retirement plan fiduciary is an honorable undertaking. Just thinking about the fact that others have put their trust in you to shepherd their hard-won savings into investments likely inspires many sponsors and advisors to high levels of mindful care and conscientious decisionmaking. On the flip side, of course, the increasing frequency of 401(k) and 403(b) litigation might also inspire some sleepless nights. Maybe many.
We’ve written about best practices and how to be aware of certain rules and regulations — preventive measures, so to speak. But only recently have we begun hearing about fiduciary insurance as an added measure. Curious to know more, we asked Wendy Von Wald, fiduciary product manager at Travelers for her perspective on this type of insurance.
BenefitsPRO: What exactly is fiduciary insurance?
Wendy Von Wald: Fiduciary liability insurance helps protect companies from claims of mismanagement and the legal liability associated with serving as a fiduciary. The product provides coverage to a company that sponsors a retirement or health care plan for its employees against claims alleging errors in the administration of a plan or a breach of the Employee Retirement Income Security Act of 1974 (ERISA).
Those claims have been on the rise: According to Groom Law Group, the number of ERISA lawsuits filed in 2020 were 80% higher than 2019, and double the number from 2018. Fiduciary liability insurance provides access to specialized defense counsel, coverage for defense costs and in many cases, payment for the settlement of claims against corporations, their directors and officers and fiduciaries to benefit plans.
Who needs it, and what should one look for?
Any company or organization that offers its employees a retirement or health care plan should consider fiduciary liability insurance. That includes publicly traded companies, private companies, financial institutions and nonprofit organizations.
A person’s fiduciary status is not always obvious. It’s based on the functions performed for a plan, it is not a person’s title. Under ERISA, a person can be a fiduciary because they are named as such, or because they exercised discretion with respect to the management or administration of a plan or the disposition of its assets.
Fiduciaries are held to the highest duties under the law, including the duty of loyalty, which requires fiduciaries to act solely in the interest of plan participants and beneficiaries – not the company – when making decisions about the plans. There is also the duty of prudence, requiring fiduciaries to act with care, skill and diligence. Fiduciaries also must diversify the investments of the plan and act in accordance with the plan documents so long as they comply with ERISA. A fiduciary’s personal assets may be at risk if they do not carry out their obligations, so lining up an insurance policy can help cover what is often costly litigation.
The first thing a company or organization should do is learn all about ERISA’s fiduciary requirements to ensure it is in compliance, then work with their insurance agent or broker to make sure the proper coverage is in place.
What are the most common fiduciary mistakes or missteps?
A number of class action fiduciary claims are related to excessive fee lawsuits, which can allege any number of mistakes made by a fiduciary when it comes to administering or managing a 401(k) or 403(b) retirement plan. Excessive fee lawsuits are often brought when a plan’s investments do not meet employee expectations or fees charged to the plan participants are alleged to be excessive. These fiduciary mistakes can also include:
- Poor investment performance
- Too many investment options
- High recordkeeping fees
- Not adhering to plan documents
- Offering funds with high expense rations
- Allowing the plan to invest with parties who are related to the plan
As pointed out by the Groom Law Group, these excessive fee class action lawsuits have increased substantially and settlements have been large. These cases have been expensive, with at least 18 of them each settling for more than $20 million, which does not include the costs of defense.
What’s the best way fiduciaries can avoid making these mistakes?
Fortunately, there are a number of best practices fiduciaries can follow to help avoid a lawsuit. Having a fiduciary engage in consistent and sound due diligence goes a long way. These steps include securing regular RFPs (requests for proposals) from plan service providers, monitoring fund performance and recordkeeping fees, reviewing and adhering to plan documents, documenting meetings with plan service providers, as well as soliciting advice from outside experts, such as investment, legal and accounting professionals.
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