In 1974 Congress passed a law called the Employee Retirement Income Security Act (ERISA). ERISA was created in response to abuses of benefit administration and retirement programs.
The ERISA law regulates the administration of pension and welfare benefit plans offered by private employers. Under ERISA law business entities that administer, design, evaluate, manage and have discretionary control over the plan’s administration or the investment of plan assets are called “Fiduciaries”.
There are two broad categories of benefit plans falling under ERISA:
A Fiduciary is any person who:
Fiduciaries are required to perform their duties solely in the interest of the plan participants and their beneficiaries. Fiduciaries must exercise the care, skill, prudence, and the diligence of a prudent person who is acting in a like capacity and is familiar with such matters. This is commonly referred to as the “prudent expert” rule. ERISA requires that the fiduciary be an expert in his or her duties, not just a “prudent person”.
Fiduciary liability is personal, absolute and unlimited. ERISA made fiduciaries personally liable for their actions.
A Co-Fiduciary might be a third party administrator (TPA), a professional consulting firm, or outside service provider (OSP) that exercises discretion over the management or administration of a plan, or provides investment advice for a fee.
A Co-Fiduciary should be financially stable and have a strong professional reputation. A Co-Fiduciary should have a proven track record of performance and experience in dealing with ERISA issues.
The Co-Fiduciary should maintain and have adequate limits of professional liability insurance with affirmative fiduciary liability coverage.
“Promised” coverage or benefits or promised performances are at the core of most ERISA lawsuits. In recent years, there has been an increase in the number of suits involving the management and misuse of plan assets.
NO, although nearly 50% of Fiduciaries think their ERISA mandated fidelity bond protects personal assets, it does not. ERISA requires you to bond or insure your plans from employee dishonesty in the lesser of $500,000 or 10% percent of all plan assets. The fidelity bond protects the plan from loss due to dishonest acts of those who handle plan assets.
Yes, The Department of Labor requires Plans to have a ERISA Bond. Fiduciary liability is not required by ERISA but recommended.
A fiduciary liability policy protects the personal assets of a plan Fiduciary due to allegations of breach of fiduciary duties.
Yes, just as businesses need to control property exposures, work place injuries and other risks inherent to business in general, there is also need to “manage” one’s employee benefit programs. The unprepared employer may find itself being sued for providing incorrect or misleading information to an employee.
Plan Fiduciaries can never completely insulate themselves from liability. Plan Fiduciaries can take steps to reduce their personal liability, however ultimately they are responsible for the management and administration of the benefit plan.
Look carefully, most other policies exclude fiduciary liability exposures as well as those exposures pertaining to ERISA.