When a company sets up a 401(k)
plan or pension plan for its employees, the focus is on the benefit that
it is providing to its employees. Owners and
executives are not always aware of the
added liability that they incur. The Employee Retirement Income Security Act of
1974 (ERISA) formalized and increased the
potential liabilities of fiduciaries, says
Gloria Forbes, executive vice president
with ECBM. It doesn’t stop there though as
ERISA holds those individuals to the highest degree of care, creating a significant risk
for many people.
Smart Business spoke with Forbes about
such personal liability risks and what you
can do to protect yourself and your future.
Who is exposed to this personal liability?
Any employee who is a trustee of the plan
is liable to the plan participants along with
the employer or owners of the firm. This is
often a financial or human resources officer
or director. But it doesn’t stop there.
Fiduciaries include any individual who
exercises any discretionary control in managing plans or has authority or responsibility for administering plans.
Many people are in tune with some of the
risks because they are aware of the fidelity
requirements of ERISA. They must show
evidence of crime coverage for their IRS filings — their 5500 forms. ERISA includes a
provision requiring uninsured plans to
have an employee dishonesty policy of 10
percent of the plan assets. While important, the ‘ERISA bond,’ as it is often
referred to, does not provide all the protection that is needed.
What other steps can employers take to protect their assets from personal liability risks?
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 stand-alone form. There are many insurance companies that provide
the coverage.
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.
Are there any steps employers can take to
help protect their employees’ investments?
The assets of employees in these plans are
invested by the individuals according to
their appetite for risk and their current age
and retirement age. Because many of these
investments involve the purchase of equities
and bonds, there is risk involved. The best
thing employers can do to help their
employees is offer a program with a quality
investment firm and provide many options.
Additionally, the employer should audit
and require a full report of all compensation
that the investment company and broker
are charging for the management of the
plans. These are often undetected layers of
charges that can become quite significant,
reducing employees’ earnings in their plan.
A diligent search of the marketplace for
qualified providers with many options available to employees for investment reduces
risk. Ask your investment firm to provide
education or advice to employees about
their investment options.
Should risk management plans be put in
place for personal liability risk?
As with any risk management plan your
goal is to eliminate and reduce the risks that
you can, transfer risks in contracts where it
is possible and insure the risks you cannot
financially absorb. The risk reduction and
elimination task is a little more complicated
with ERISA liability than with other exposures like workers’ compensation.
Expect the Department of Labor and the
IRS to increase their oversight of ERISA
compliance. Regulations change frequently
and can create new reporting requirements
or liabilities of which a company may not be
aware. Uncertainty is probably the greatest
area of risk for any firm. An annual review
with your insurance broker or legal counsel
can keep you abreast of current issues.
There is increased focus on making sure
that there is no evidence of conflict of interest. Placing your employees’ assets in these
plans with a company bank, investment firm
or other relationship for leverage can result
in civil penalties, fines and liabilities.
GLORIA FORBES is executive vice president at ECBM. Reach her at [email protected] or (888) 313-3226.
