Fiduciary liability protects fiduciaries of retirement and other employee benefit plans
Under the Employee Retirement Income Security Act (ERISA), fiduciaries of retirement and other employee benefit plans can be held personally liable for losses to a benefit plan incurred as a result of their alleged errors, omission or breach of their fiduciary duties.
Fiduciary liability insurance protects any employee who has discretionary authority over a plan or who assists in its administration. This list of individuals might include an appointed fiduciary, a plan administrator, a human resources employee or anyone who helps to administer a plan.
ERISA also broadly defines the types of employee benefits plans for which fiduciaries are responsible, including pension plans and even health and welfare plans. Allegations can be brought by plan participants, participants’ legal estates, the Department of Labor and the Pension Benefit Guaranty Corporation.
What are the common misconceptions with fiduciary liability?
“I have an ERISA bond and am protected.”
False. ERISA mandates the protection of an ERISA bond to guard against theft of plan assets by the trustee. This bond does not cover the personal liability that is imposed on fiduciaries by ERISA.
“I have transferred my risk to Third Party Administrator who handles all of the investments for our employees.”
False. Retaining a qualified TPA is a prudent risk mitigation practice, but it does not absolve you from liability under ERISA. ERISA precludes the transfer of this risk and holds plan fiduciaries responsible for the selection and monitoring of TPA and investment firms.
Scenarios where your employees may be held liable:
- An executive asks his HR department to move his retirement plan funds into specific mutual funds. Instead, the funds were rolled into money market funds that performed poorly.
- Plan participants allege that the fiduciaries of a 401(k) plan had failed to divest the plan of an investment option that was not keeping pace with the performance of the comparable index and resulted in poor returns.
- Employees sue the plan fiduciaries alleging that negligent investment practices needlessly depleted plan assets.