What's the
difference?
Most employers know that if they offer employees a pension or profit
sharing plan, they are required under ERISA to have a fidelity bond to cover a percentage of the assets
of the plan. However, many also confuse fidelity coverage with fiduciary
liability coverage. These are two very different coverages. The intent
of a Fidelity Bond is to cover the assets of the plan from loss through employee
dishonesty. The intent of Fiduciary Liability coverage is to protect the
trustees and other fiduciaries of the plan from allegations of mismanagement or
negligence in the administrations of a benefit plan. (Employee benefit
liability coverage, which is sometimes added to the general liability
policy, is intended to cover clerical and record keeping
errors.)
Who is a
Fiduciary?
Any
person who exercises discretionary authority or control in the management or
administration of the plan is a fiduciary. This would include the trustees named on
the plan as well as anyone who explains or interprets benefits, such as Human
Resources personnel. Administration also includes giving counsel, handling
records, effecting enrollment, and termination or cancellation of benefits. It
also includes selection of a third party administrator to manage or invest the
plan. Under the ERISA law, fiduciaries are personally liable to restore
to the plan any losses resulting from a breach of fiduciary duty as well as to
restore to the plan any profits made by the fiduciary through the use of plan
assets.
What is Expected of a
Fiduciary?
A
partial list of the standards of conduct of a fiduciary to the benefit plan are
as follows: 1) Assets must be diversified to avoid risk of large losses
(Diversification Rule); Trustees, even under a 404c self-administered plan, have
an obligation to offer diversified plans and to continue to monitor and evaluate
plans offered. 2) Investments must be selected and managed "with an eye single
to the interests of plan participants" (Exclusive Benefit Rule); and, 3)
Fiduciaries must act in the same manner as a prudent expert would under like
circumstances (Prudence Rule). In other words, fiduciaries are held to a high
standard of care.
Am I
Protected?
Not only
can plan participants and beneficiaries sue, but also the Department of Labor,
the plan itself, or other fiduciaries (to avoid complicity with the allegedly
negligent fiduciaries). The most common reasons for suits are: false or
misleading statements, discrimination, imprudent investments, lack of
diversification, non-compliance with plan documents and (the most common) errors
in the administration of plans. The average cost to defend a claim is $121,000.
The average indemnity payment (pre-Enron) was $1.9 million.The plan itself can
even purchase the coverage on behalf of its fiduciaries to protect its
beneficiaries.
In summary, if you have a benefits plan
that is subject to ERISA, you should not only consider the cost of having a fiduciary liability insurance policy;
you should also seriously consider the cost to
yourself and to your administrators of NOT having this protection.
Should you have any
questions about Fiduciary or Fidelity Coverage, please contact a Potter-Holden agent at 770-399-6760. We will be happy to
assist you.
|
