How are fiduciaries held liable?
The Supreme Court ruling in February 2008 states, ‘Any person who is a fiduciary with respect to a plan who breaches any of the responsibilities, obligations or duties imposed upon fiduciaries by this title shall be personally liable to make good to such plan any losses to the plan resulting from each such breach.’ The key word in that ruling is ‘personal.’ That means there is no corporate veil in place to protect you. Any consequences will pass through to you, personally.
A study by the Investment Company Institute, a Washington-based group representing the mutual fund industry, determined that costs for small plans (less than $500 million) are, in fact, quite high. It does suggest that there needs to be an alternative to those high fees for small plans. For example, a difference of 50 basis points on a person’s 401(k) in the U.S. may end up adding up to more than $50,000 per employee over the course of his or her career. For a 100-employee company, this adds up to $5 million in personal liability.
What should fiduciaries do to ensure they are fulfilling their responsibilities?
There are four major rules to which a fiduciary should adhere when administering a 401(k) plan. Establish the expenses of your plan, benchmark that those expenses are reasonable, document that you have done this and keep the documents safe. They are your personal liability protection.
In addition, ERISA precludes the use of corporate indemnification. However, a fiduciary liability policy can be purchased. These policies are not expensive and provide the protection that a company and its trustees need. A privately held firm can purchase it as part of a ‘package policy,’ along with its directors’ and officers’ and employment practices coverages. This policy can also be sold as a standalone form.
Every firm that has any pension, 401(k) or similar savings plan should purchase a fiduciary policy. The limits purchased should be adjusted to the size of the plans covered. Defense costs are often part of the limit of liability purchased. Employees should make sure that employers have taken that into account with their coverage, as well.
What should fiduciaries do to make sure they have the correct protection?
Employees who have fiduciary responsibilities should question whether a fiduciary liability policy is in place. Fiduciary liability policies are not standard contracts like many of the insurance policies that are purchased.
Make sure that the policy language is thoroughly reviewed and that available coverage extensions are included. For example, defense costs can be provided within the limit of liability or in addition to the limit. Since these lawsuits are often very costly to defend, much of the protection you need can be eaten away in defense. Every attempt should be made to have defense outside of the limit.
Charles Bernier is the president of ECBM Insurance Brokers and Consultants. Reach him at (610) 668-7100 or [email protected].
