Fiduciary Liability Exposures, and How to Minimize Them
Lets discuss two main topics:
exposures...
In 1974, Congress passed the Employee Retirement Income Security Act, known as ERISA . This law was enacted to protect the participants and beneficiaries of pension and welfare plans. Basically, ERISA established the standards of conduct for fiduciaries. Fiduciaries assumed new responsibilities and accountability in the management and administration of employee benefit plans.
As a result of ERISA, direct indemnification of a Fiduciary by the Plan was void. In other words, the plan could no longer relieve the Fiduciary from liability brought on by his ERISA imposed duties.
The most dramatic effect of the law was that fiduciaries would be held personally liable for a breach of their fiduciary duties imposed upon them under the law.
And, that Personal Liability extends to all types of plans.
Falling under ERISA is any plan, fund or program established exclusively for the purpose of providing employee benefits to its participants.
There are two broad categories of Benefit Plans falling under ERISA: Retirement Plans and Welfare Plans.
Retirement "type" plans include Defined Benefit Pension Plans, Profit sharing or savings plans such as 401(k)s, stock purchase plans, and even Employee Stock Ownership Plans.
Welfare Plans are also subject to ERISA and include Medical, Dental, Life and Disability plans.
So you can see, the scope of ERISA is very broad...
ERISA purposely defines employee benefit plans to encompass a wide variety of employee programs - subject to its regulation. Courts have broadly interpreted the definition of Employee Benefit Plan to include informal employee practices such as Severance packages, Social Security and Workers Comp Benefits.
Who is considered a Fiduciary ...
Any individual included in the plan document by name or title, or any one who has discretionary authority over the administration or management of a plan or its assets. The term is loosely defined...intentionally...to hold accountable all individuals who may be responsible for misuse of plan assets or a loss to plan participants.
In an organization, a fiduciary could be:
and what are their responsibilities?
Well, there are far too many to discuss here, but we can hit on a few critical ones:
First, all activities and transactions performed by a fiduciary must be for the Exclusive Purpose of providing benefits to the participants. This is known as the "Sole Benefit Rule".
Fiduciaries must ensure that there is Diversification of Assets to minimize the risk of large losses.
ERISA forbids fiduciaries from engaging in self dealing and Party-In-Interest transactions. For example, a fiduciary should not benefit personally from transactions made on behalf of the plan.
Fiduciaries are required to exercise the same care, skill, diligence and Prudence that a person familiar with such matters would do in managing a similar situation. Otherwise known as the "Prudent Person Rule".
They also must Monitor Investment Performance ...this includes ongoing scrutiny of investment returns and the performance of the outside investment professionals.
Lastly, and this is no easy task,... they should understand the nuances of ERISA. The ERISA text, including the legal commentary is four inches thick - and over 1,800 pages long..... it gives "fine print" a new meaning.
ERISA standards revolve around a basic theme - documented prudence. The standards of ERISA must be followed. Fiduciaries must act in accordance with the plan document which should be consistent with ERISA. The plan document outlines the eligibility parameters and plan structure.
The point is... that trustees, who generally have other jobs, have a tremendous burden in terms of what is required of them.
- a brief note on claims...
ERISA created many new opportunities for the legal profession...a new and specialized field of law.
And the law is very complex. Accordingly, the claims are often difficult and unique. Claims can range from administrative errors such as incorrect benefit calculations... to allegations of improper counsel...to claims alleging wrongful termination of a plan or imprudent investment selections.
Claims can be individual situations or class action law suits...They are brought by employees, their beneficiaries, and some are even brought by the Department of Labor on behalf of the participants.
Employee Benefit Plans can also be audited at any time by the DOL and the IRS. If the DOL finds fault with the management of Plan assets, they can bring suit against the Fiduciary - personally.
Incidentally, with enhanced automation and more stringent reporting requirements, the Department of Labor suits have risen.
Often times claims have merit, but many don't. Even if all the "i's" are dotted and the "t's" crossed, trustees can still be sued.
According to the 1993 Wyatt Fiduciary Liability Survey Report ERISA suits grew 35% from 1989 to 1993, and the average claim is $800,000, with $400,000 of that being defense costs.....an idea of where the Fiduciary claims are coming from: 44% of all claims are resulting from Benefit Disputes , while 10% are a result of Administrative Errors
As you can see the risk is REAL.
When you consider the size of the assets held for retirement and complexities of properly maintaining a qualified Plan, it is not surprising to find that Plan Fiduciaries surpass the medical profession as a target for litigation.
It is also important to note that ERISA case law is still considered fairly new and continues to evolve at a rapid pace based on increased frequency and severity of claims.
Now that you are aware of the certainty of risk, who is deemed a Fiduciary and the personal liability that every Fiduciary takes on, you need to be aware of how Fiduciaries can protect themselves or at least minimize their exposure - financially.
Ways a Fiduciary can Minimize the Personal Liability
A Fiduciary can never fully insulate themselves from liability, nor transfer the responsibilities for compliance to someone else. But the exposure of ERISA liability can be greatly reduced by employing a complete team of knowledgeable advisors.
An Attorney is needed to draft the Plan document and provide legal counsel. Due to the complexity of ERISA law, an attorney should be chosen that has expertise in ERISA Law.
A Plan Administrator provides services to maintain the Plan. A Plan administrator can be an individual employed by the Plan, but most often Third Party Administrative firms are hired, that specialize in plan administration. An administrator assumes all or most of the duties of the sponsor in the administration of the plan.
An Accountant is needed to audit the Plan and file the necessary IRS documents. An audit is required by ERISA for any plan with more than 100 participants and the IRS documents required are referred to as Form 5500s. Welfare plans with over 100 participants are also required to have an audit, except when the plan is fully insured.
The services of an Actuary are required when a funded welfare plan or defined benefit plan are in place. The Actuary will determine adequacy of funding and loss reserving policies.
Financial Advisors assist in meeting ERISA imposed fiduciary responsibilities regarding the management of the assets of the Plan. Along with hiring a qualified professional, clearly defining investment guidelines and respective authorities of investment manager and other plan fiduciaries is necessary.
It is also important that the Fiduciary have sufficient Internal Staff to support and properly administer the plan.
It is imperative a Fiduciary become Educated about their duties, responsibilities and liabilities as a plan trustee. It is equally important that a review of the duties of all fiduciaries in a company is conducted to make sure these duties are clearly defined and set forth in a written document.
As mentioned previously, a Fiduciary can take steps to reduce his personal liability by hiring a team of experts, but the Fiduciary remains ultimately responsible for the management and administration of the Employee Benefit Plans. For example, failure to select a competent investment manager or failure to monitor the performance of these selected investment professionals and performance of the plan portfolio is considered a breach of their duties.
To provide liability protection for both the Fiduciary and a Company sponsoring a Employee Benefit Plan the purchase of Fiduciary Liability Insurance is highly recommended.
Fiduciary Liability is an increasingly important issue as more people are relying upon 401(k) plans, pension and profit sharing plans to fund their retirement years. Severance packages associated with corporate downsizing, benefit reductions, and early retirement packages are hot topics in a rapidly changing business environment. Once again, knowledge of ERISA and fiduciary liability plays a key role in effectively managing welfare plans as well.
As a side note, and to refresh your memory, ERISA imposed a statutory requirement that each plan carry an ERISA Fidelity Bond in the amount of 10% of all plan assets handled. The intent of the fidelity bond is to protect the plan assets from loss due to dishonesty.
This is not to be confused with Fiduciary Liability Insurance, which protects the personal assets of the Fiduciary.
The Fiduciary Policy protects the Fiduciary against wrongful acts or, in other words - breach of their Fiduciary duties.
The policy also provides coverage for errors & omissions in the administration and management of an employee benefit plan. Mismanagement, negligence or simply a mistake could lead to an allegation of a wrongful act.
