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Fiduciary Liability vs. ERISA

Posted on by McClone

Posted by: Chris Wilson, Strategic Risk Advisor

Do you know the difference between Fiduciary Liability insurance and an ERISA bond? If you don’t, you’re not alone; many people think they offer the same protection. That’s not a big deal when you aren’t involved in administering pension plans, welfare plans, or other employee savings accounts. But if you are, it’s very important to understand if you’re a fiduciary – and whether or not you’re putting yourself at risk.

ERISA bonds are required for trustees or others who handle pension plans, welfare plans, or other employee savings accounts and provide coverage for loss of funds because of embezzlement or theft. Fiduciary Liability, on the other hand, provides insurance for claims against fiduciaries for conduct and decisions made in administration of the plans. So what’s a fiduciary?

In the November 5, 2012 Insurance Journal, John Trefry, Fiduciary Liability Product Manager for Travelers Bond and Financial Products, writes, “under the Employee Retirement Income Security Act of 1974 (ERISA), anyone who has responsibility for managing employee benefit plan assets or has discretionary responsibility for a plan’s administration is considered a fiduciary… fiduciaries face personal liability, could be at risk, for any breach of the responsibilities, obligations or duties imposed upon fiduciaries by ERISA.”

Do you know if you are a fiduciary for your company’s plans? If you have discretionary authority or responsibility for administrating a plan, you are a fiduciary – even if you are not named as a trustee in the plan documents. In addition, if you have authority to hire or contract with an outside source that provides investment advice, you and the person you hire are also fiduciaries.

If any of these definitions apply to you, you have responsibilities as a fiduciary of the plan. According to In 29 U.S.C 1104: Fiduciary Duties, your duties are to:

1. Act “solely in the interest of the participants and beneficiaries.”
2. Act “with the care, skill, prudence, and diligence under the circumstances then prevailing that a prudent man acting in a like capacity.” If you do not have the expertise, then you must obtain expert help.
3. Diversify investments in order to minimize risk of loss unless prudent not to do so.
4. Act in accordance with the Plan documents and instruments “insofar as such documents and instruments are consistent” with ERISA rules.

Now that you know you could be held personally liable, you may be asking what could possibly happen. Here are some examples of actions resulting in claims actually paid by our insurance carriers:

1. Failed to transfer funds in a timely manner.
2. Eliminated a profitable investment option.
3. Failed to enroll an employee.
4. Charged what appear to be excessive management fees.
5. Failed to set aside funds to pay medical benefits for a self-insured health plan.
6. Misrepresented Plan benefits regarding eligibility.
7. Miscalculated of lump-sum distribution of pension benefits.

Many trustees think they do not need Fiduciary Liability Insurance because a third party administrator handles the Plan, but the list above indicates that you as a trustee may have more exposure than you think. If you are not carrying Fiduciary Liability insurance, we strongly recommend you discuss your risk with a McClone Strategic Risk Advisor.

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