A fiduciary is an individual or entity acting on behalf of others. In the context of employee benefits plans, certain board members, benefits administrators or investment advisors may serve as fiduciaries responsible for selecting and managing such plans (i.e., health insurance and retirement accounts) for an organization. Fiduciaries are ethically and legally required to act in plan participants’ best interests by taking all necessary steps to preserve their financial well-being.
Because fiduciaries play such a key role within an organization, they may encounter a range of risks and liabilities. Specifically, fiduciaries found in breach of their duties could be subject to serious legal penalties and costly lawsuits, threatening both their personal assets and their company’s image.
With this in mind, it’s crucial for organizations to implement mitigation strategies to help protect their fiduciaries and cultivate a culture of corporate trust and integrity. This article explains fiduciaries’ core responsibilities, outlines common exposures these individuals may face, and highlights related risk management and coverage considerations.
Fiduciary Responsibilities
Fiduciaries are bound by federal law, namely the Employee Retirement Income Security Act of 1974 (ERISA). When acting in their roles, this legislation requires fiduciaries to uphold the following duties:
· Duty of loyalty—Fiduciaries’ actions must always be rooted in plan participants’ best interests. They shouldn’t let personal matters influence their actions or conflict with participants’ welfare.
· Duty of prudence—When making plan-related decisions (e.g., selecting coverage options or managing assets), fiduciaries are required to leverage their full professional skill sets, practice administrative diligence and maintain awareness of any associated risks.
· Duty to diversify investments—Fiduciaries must take sufficient steps to limit the likelihood of plan participants experiencing large-scale financial losses from investment volatility. This primarily involves diversifying plan investments, with the only exception being if it’s clearly prudent not to do so, as specified by ERISA standards.
· Duty to follow plan documents—Unless they contradict ERISA requirements, fiduciaries must comply with all terms, policies and procedures—including any amendments—outlined in participants’ plan documentation.
ERISA also establishes the legal framework under which fiduciaries may be held personally liable for breaching their duties. As a result, fiduciaries who fail to act loyally, prudently or in accordance with plan documentation could experience major consequences.
Fiduciary Exposures
Due to the nature of their roles, fiduciaries face many risks and liabilities. These exposures typically stem from claims alleging that fiduciaries breached their duties in some way. Common claims include:
· Mismanaged benefits—These claims allege that fiduciaries failed to select or handle employee benefits plans properly, resulting in issues such as coverage gaps, mismanaged assets or a lack of investment diversification.
· Conflicts of interest—Such claims allege that fiduciaries let their personal circumstances or affiliations impact their decisions regarding employee benefits plans, violating their duty of loyalty and compromising their obligation to act solely in participants’ best interests.
· Administrative errors—These claims allege that fiduciaries didn’t perform their due diligence while handling employee benefits plans, leading to mistakes such as late filings, incorrect participant information or a failure to communicate required notices—all of which can cause possible plan denials and delays.
When such claims occur, they can carry severe ramifications. Under ERISA, fiduciaries and organizations could encounter both civil and, in cases of willful misconduct or fraud, criminal penalties. For instance, willful violations of ERISA reporting or disclosure requirements may result in as much as $100,000 in fines and up to 10 years in prison for a fiduciary, while an organization could incur a maximum of $500,000 in fines.
Furthermore, fiduciaries and organizations may face costly legal action from impacted employees, prompting lasting financial fallout and reputational damage. For fiduciaries, this could wreak havoc on their personal assets and hinder future career opportunities. For organizations, this could drive down stakeholder trust and employee morale, making it increasingly difficult to attract and retain staff and maintain operational stability.
Risk Management and Coverage Considerations
To help minimize fiduciary risks and liabilities, organizations can utilize the following strategies:
· Conduct training. Organizations should regularly train fiduciaries to ensure they clearly understand their core responsibilities, compliance requirements and the consequences of breaching their duties. Fiduciaries should be encouraged to voice any concerns about meeting these expectations before they become larger issues.
· Establish internal controls. Adopting internal policies can also help organizations reduce fiduciary exposures. These policies should outline steps for selecting employee benefits plans, managing assets, ensuring diverse investments and maintaining related documentation. Additionally, they should set up audit procedures, role-based access controls and detailed decision-making processes to promote proper oversight of fiduciary actions and allow corrective measures to be taken when necessary.
· Consult trusted professionals. Organizations should be sure to involve experienced benefits administrators and investment advisors within their fiduciary processes. Consulting these professionals can equip organizations with the information and resources to uphold solid plan management and ensure ERISA compliance.
Organizations should also purchase specialized coverage to help financially safeguard their fiduciaries and operations. In particular, fiduciary liability insurance can offer protection amid allegations of breached duties that lead to shortcomings in employee benefits plans. This type of policy may help pay for legal defense costs arising from such allegations and reimburse losses incurred by participants due to associated plan issues.
Fiduciary liability insurance is necessary because it provides coverage that isn’t available under other liability policies. Directors and officers liability insurance excludes coverage for fiduciary matters, while professional liability insurance is limited to incidents involving customers—not staff. As such, this coverage is imperative to mitigate financial fallout when fiduciary liability incidents occur.
Conclusion
By properly addressing fiduciary risks and liabilities, organizations can give employees ample benefits, avoid large-scale losses and foster ongoing operational success. Contact us today for more risk management guidance and insurance solutions.
For informational purposes only. Not intended as legal advice.
