Nearly all construction and design firms have some sort of employee retirement program as well as health care benefit programs. The fiduciaries of these programs are responsible for a number of things, including enrollment and administration, establishing an investment policy, choosing a plan administrator, monitoring the plan results, and educating participants with regard to investment choices.
What many people may not understand is that all managers and fiduciaries that handle these programs are subject to personal liability in the event there is a claim related to employee benefit programs. This is imposed by the Employee Retirement Income Security Act of 1974 (ERISA). For more information on a fiduciary's responsibilities, visit the Department of Labor's website at http://www.dol.gov/ebsa/publications/fiduciaryresponsibility.html.
There are a number of misconceptions pertaining to fiduciary liability and what companies need to do to protect themselves from exposure to lawsuits. Executives might think:
1.) “We have an ERISA Bond, so we're covered.” On the contrary, ERISA bonds are required by law and must be in an amount equal to 10 percent of the assets in the plan, or $500,000, whichever is less. Effective January 1, 2008, this requirement was increased to $1 million for any plans that include an employer's securities (any stock issued by an employer of employees covered by the plan). ERISA bonds protect plan participants from theft by plan administrators. This covers only theft – it does not cover claims brought by employees or plan participants.
2.) “We have Employee Benefits Liability (EBL) endorsed on to our General Liability policy – we're covered.” Not so. Employee Benefits Liability covers the company and its administrators from legal liability arising out of administrative errors. It specifically excludes breach of fiduciary duty.
3.) “We use a third party administrator to run our program, so the risk is theirs!” If a third party administrator makes a mistake, it may be responsible. However, ERISA specifically prevents those responsible for running employee benefit programs from transferring their personal liability to a third party by contract.
The exposure to fiduciaries has recently escalated. Historically, individuals could not bring suit against a fiduciary. It was only when a fiduciary error caused an entire plan to sustain losses that a suit was allowed. This all changed in late February 2008 when the U.S. Supreme Court rendered its decision in a case involving James LaRue and his employer, DeWolff, Boberg & Associates, Inc.
LaRue sued his former employer for failure to move assets within his 401(k) as he had instructed them to do. He alleged that this failure cost him $150,000. The court overturned the previous ruling that precluded an individual in a plan from bringing suit. They didn't rule on whether or not LaRue should prevail in the case, but ruled that individuals now have the right to bring suit against their employers if they feel the employer didn't exercise the appropriate degree of skill and care. Although it remains to be seen, this may well generate an increase in claims against fiduciaries.
If you don't currently have fiduciary liability coverage, you may want to consider it. The cost may be fairly minimal. For a 50-person firm, $1 million of coverage usually costs $1,500 or less. In many cases, if you already carry either an employment practices liability or directors and officers liability policy, you can add fiduciary liability to the existing policy at a lesser cost.
- Choose the right third party administrator (TPA) or investment advisor, and make certain your contract with them requires them to be responsible and holds you harmless for the consequences of their negligent acts, errors or omissions.
- Make certain your TPA or investment advisor has appropriate professional liability insurance.
- Review your plan's investment options to make certain the choices are prudent and that a wide range of investment options are available.
- If company stock is one of the options in your program, warn employees about the dangers of accumulating high percentages of this asset.
- Make certain your employees are educated about your program and understand their options. A formal education meeting should be held at least once a year.
- Fiduciary liability is a real exposure. Although it lends itself to be managed, the cost of transferring this risk to an insurance company is fairly modest and should be considered.
Jeff Cavignac, CPCU, ARM, RPLU, CRIS, is president of San Diego-based Cavignac & Associates.