Fiduciary Warranty, Liability Insurance Have Costly Differences

By Larry Reynolds  

Fifty-two percent of retirement-plan sponsors thought a fiduciary warranty would protect them from a participant lawsuit, much like fiduciary liability insurance, according to a 2010 survey by Unified Trust Co., a Lexington, Ky. financial-services company, but that is not the case, Ary Rosenbaum, founding partner of the Rosenbaum Law Firm PC in Garden City, N.Y., told Bloomberg BNA in a May 27 e-mail.

“A fiduciary warranty sounds nice and really important, but it's something that isn't worth much. It also may make some plan sponsors assume certain protections that aren't there because they use the word fiduciary,” Rosenbaum said in an April 11, 2013, article, “The Worthlessness of The 401(k) Fiduciary Warranty.

In many cases, warranties “are more of a marketing gimmick,” J. Scott Gehman, a benefits consultant with Conrad Siegel Actuaries in Harrisburg, Pa., said May 30 in an e-mail.

A fiduciary warranty “is like lightning insurance; actually I think a plan sponsor has a better chance of getting hit by lightning than a plan sponsor being defended through one of these warranties,” the Rosenbaum article said.

“It is important for plan fiduciaries to be aware of what their responsibilities are regarding plan oversight-not only because of their obligations to plan participants but because of the personal liability they take on by virtue of being a fiduciary,” Strategic Benefit Services' vice president of business development, Carol Idone, said in a June 5, 2014, Retirement and Benefit News blog posting that linked to the white paper, “Fiduciary Roles and Responsibilities Under ERISA Defined Contribution Retirement Plans.”

“Fiduciaries of defined contribution retirement plans are under closer scrutiny than ever before. Plan participants are filing lawsuits, the media has increased its attention on fiduciary failures, and during plan audits the U.S. Department of Labor now routinely asks for evidence of fiduciary training,” the Strategic Benefit Services blog posting said.

According to Colonial Surety Company, typical claims against retirement plan fiduciaries include allegations of improper advice or disclosure, inappropriate selection of advisors or service providers, imprudent investments, lack of investment diversity, breach of responsibilities or fiduciary duties imposed by law, negligence in the administration of a plan and conflict of interest as to investments.

Knowing the difference between a fiduciary warranty and fiduciary liability insurance is important in today's lawsuit-prone environment.

Because of “an upswing in participant lawsuits, as well as more oversight by the Internal Revenue Service and the Department of Labor, plan sponsors are starting to understand the seriousness of being a fiduciary,” the Rosenbaum article said.

Unlike a fiduciary warranty, a liability insurance policy tends to be more useful because it protects plan sponsors and trustees from defense cost and penalties if they are sued for fiduciary misdoings, according to the Colonial Surety Company website.

Plan Design and Administration

There is no single plan design that is best, so having a plan structure that is thoughtfully and intentionally designed and well-administered is important to avoid possible legal problems, said the Chubb insurance company's special report, “Who May Sue You and Why: How to Reduce Your ERISA Risks, and the Role of Fiduciary Liability Insurance.”

The following factors should be considered by employers to enhance their retirement plan's design and administration, Chubb said:

  • Avoid naming the plan sponsor as a fiduciary. Instead, consider whether a committee structure is more appropriate, creating an employee benefits committee to be named as the fiduciary, Chubb said. The committee structure may help differentiate the fiduciary functions from the nonfiduciary functions and also may help to avoid attribution of certain knowledge from the sponsoring employer's executives to the fiduciaries, it said.
  • Avoid naming key corporate officers as fiduciaries. CEOs and CFOs often possess inside information that plaintiffs may claim prevented them from fulfilling their duty of loyalty, Chubb said. The general counsel also often possesses privileged information about the sponsor that plaintiffs may claim must be divulged, it said.
  • Carefully craft delegation authority. Consider allowing the named fiduciaries to designate a person who is not a named fiduciary to carry out fiduciary responsibilities without being liable for the latter's acts or omissions, Chubb said. To accomplish this, the plan must create a procedure for the delegation, it said.
  • “If procedures are included in the plan, a named fiduciary will not be liable for the acts or omissions of delegated fiduciaries, provided the named fiduciary acts prudently in the delegation of responsibility and periodically reviews the performance of the delegated fiduciaries,” Chubb said.
  • Define the roles of plan sponsor and fiduciaries. To differentiate fiduciary functions from nonfiduciary functions, the fiduciary structure should clearly define the different roles; that is, clearly identify the individuals who are “appointing fiduciaries” with the duty to appoint, monitor and remove the delegated fiduciaries, it said.
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