Employers are not required to offer employee benefit plans as part of a compensation package, but they are an advantageous way to attract and retain employees. Despite their usefulness as a recruiting and retention tool, employee benefit plans carry hidden exposure for your company.
If employers offer benefit plans, those plans must comply with the Employment Retirement Savings Act (ERISA) of 1974, a federal law that sets minimum standards for retirement and welfare plans in private companies, and provides extensive rules for transactions associated with those plans. There is no doubt the provisions of ERISA are complex; often they are difficult to navigate without the help of an expert.
ERISA also establishes rules of conduct for fiduciaries who administer and manage the plans. Understanding a fiduciary’s roles and selecting the best candidates to manage your employee benefit plans are the first steps in a risk management plan for this potentially costly exposure.
What is a Fiduciary?
A fiduciary is any person exercising discretionary control and authority, and given the primary responsibility to manage or administer an employee benefit and retirement plan and its assets. Fiduciaries have titles such as: plan sponsors, plan administrators, trustees and investment managers.
There are two main types of fiduciaries:
- Named fiduciaries. These are individuals or entities that are specifically identified as the plan’s fiduciaries. ERISA requires a benefit plan to have one or more named fiduciaries, one of whom is the plan administrator.
- Functional fiduciaries. These individuals are fiduciaries because of what functional role they play, including exercising control over the plan or its investments, giving investment advice or appointing others to manage aspects of the plan.
Knowing what a fiduciary is and what their roles are is important because sometimes people have fiduciary responsibilities that may hold them personally liable—and they don’t even know it. Even directors and officers at your company, who may not be “named fiduciaries,” are accountable for the misuse or loss of plan assets. Under ERISA, directors and officers have the ongoing duty to monitor the performance of fiduciaries or appoint fiduciaries. To successfully manage employee benefit plans, all those who serve in a fiduciary role must be aware of their legal responsibilities under ERISA, which includes using quality service providers.
Fiduciary Roles and Responsibilities
The ERISA provisions and the legal obligations of a fiduciary can be a labyrinth to navigate; but all fiduciaries must be aware of their responsibilities as dictated in the plan’s documents and overseen by ERISA. Since ERISA can be complex, fiduciaries should consult an expert to help interpret the provisions.
Especially pay attention to the following ERISA rules that outline the roles of fiduciaries:
- Exclusive benefit rule: When administering a plan, fiduciaries must act prudently and with undivided loyalty to the participants and their beneficiaries, subject to the terms of the plan as long as they are consistent with ERISA. Fiduciaries should operate a plan solely in the interests of its participants. If fiduciaries are also plan participants, they must renounce their own interests to those of the plan. Furthermore, they should ensure the participants are paying reasonable plan expenses.
- Prudent person rule: Fiduciaries must perform their duties with care, skill and prudence. Fiduciaries must have adequate expertise, and if not, they must seek the advice of qualified experts and advisors.
- Diversification rule: Fiduciaries are required to diversify a plan’s investments to avoid the risk of significant losses.
- Plan documents rule: A fiduciary must act in accordance with the plan documents but only to the extent that the plan is consistent with ERISA requirements.
Select Quality Fiduciaries to Manage Your Plan
Failure to comply with ERISA can result in significant personal liability and penalties, both for the fiduciary and the company who sponsors the plan. This means the personal assets of the fiduciary are at risk in the event of litigation.
Since fiduciary lawsuits are expensive to litigate, care should be taken to select the best candidates for the position to minimize the risk. Qualities of a good fiduciary include the following:
- Their qualifications are consistent with the duties assigned
- They have a strong professional reputation
- They’ve shown a proven track record of dealing with ERISA issues
- They have personal financial stability, as fiduciaries are personally liable under ERISA in the event of litigation. Generally fiduciary responsibilities are excluded from the scope of a Directors & Officers (D&O) policy.
What is Fiduciary Liability Insurance?
Breach of fiduciary duty and other wrongful acts can lead to expensive lawsuits. The most severe claims tend to involve careless investment of plan funds, especially if the plan has invested heavily in the sponsor employer’s own stock. These claims are often brought as a class action lawsuit. An employer or plan sponsor can indemnify a fiduciary, but some companies are either not financially able to, or they can’t, due to laws that prevent them from doing so. As a result, the personal assets of a fiduciary are at risk.
A Fiduciary Liability insurance policy covers breaches of fiduciary duties and errors in the administration of the plan, and it protects the personal assets of a plan’s fiduciaries. Most D&O policies do not cover fiduciary liability issues. Those insured under the policy usually include the sponsoring organization’s officers, directors and employees acting as fiduciaries or as members of any employee benefit committee.
