As more and more companies face litigation related to their retirement plans, executives naturally wonder how they can best protect themselves and their company from expensive and time-consuming litigation. Over the past few years, total settlements from retirement plan related litigation have averaged approximately one billion dollars a year. While this number may pale in comparison to the almost twenty seven trillion dollars held in various retirement assets within the United States, it represents a substantial threat to bottom line of many businesses.
Businesses Are Not Already Protected By Most Required Insurance Coverage
Unfortunately, many businesses do not do enough to protect themselves from litigation filed under the Employee Retirement Income Security Act (“ERISA”). ERISA generally requires that companies offering retirement plans act prudently with respect to offered investment plans and to monitor the performance of those plans and the fees charged by them to ensure they provide employees with good options. As the market for retirement investments changes frequently, failing to update plan options or review fee structures in light of prevailing rates can create large exposures for a business.
These issues are compounded by the fact that, generally speaking, insurance policies do not cover breaches of fiduciary duty.
Errors and Omissions policies, for example, generally only cover mistakes made by a business in its relations with its customers, not relations with its own employees.
Many companies believe that their employee benefit liability insurance, normally offered as an endorsement to a commercial general liability policy, should protect them from this type of lawsuit.
Employee benefit liability insurance, however, only covers administrative acts of negligence in relation to employee benefits programs; it does not cover ERISA litigation. This is to say that it would cover the losses resulting from the failure to add an employee to the company 401(k) program, but not lawsuits alleging the company violated its duty of loyalty in overseeing that 401(k) program for all employees.
Fiduciary Liability Policies Protect Employees
Kevin Forbes, Vice President at ECBM says, "To cover this increasing exposure for companies, many insurance companies now offer specific fiduciary liability insurance policies. These policies will cover defense costs in the event of litigation arising from a violation of fiduciary duties, as well as indemnification for any ensuing losses meeting the policy’s criteria." He explains that "When combined with the active management of retirement options for the employees’ best interests, fiduciary liability can save a company from the massive headaches and losses that come with ERISA litigation."
Fiduciary Liability Policies Protect Management and Executives Too
Additionally, the policies can also offer critical protection for company executives and board members. Under ERISA, plan beneficiaries can hold executives and board members personally liable for violations of their fiduciary duties in relation to retirement plans. Kevin warns that "Most Directors & Officers Liability policies explicitly exclude coverage for ERISA lawsuits, so fiduciary liability insurance can offer vital protection for the personal assets of top company officials." This added protection can help ensure a company continues to attract and retain top talent in key strategic positions.
The endorsements and exclusions for fiduciary liability can become quite complicated, so companies interested in protecting their operations through this option should speak with a licensed broker today to review their options and find a policy that best matches their needs.