defined contribution (DC) plans become the main drivers of America’s retirement
savings, a plan sponsor’s role as fiduciary is becoming highly scrutinized.
Fiduciaries to a plan are legally liable to act in the best interests of plan
participants and the Department of Labor (DOL)’s Conflict
of Interest Rule is only expanding that role.
recent years, the DC space has seen a wave of litigation
surrounding the management of retirement plans. One common denominator in
these cases is the argument over alleged excessive fees.
to Groom Law Group, these cases raise “allegations against fiduciaries for
breaching their obligations to the plan and its participants by charging or
permitting excessive fees and expenses for plan services provided by third parties,
such as investment management, recordkeeping, and asset custody.” Another
common practice being challenged is the use of proprietary funds. Oftentimes,
fiduciaries are accused of offering investments from a financial institution sponsoring
the plan or its affiliates for the sole purpose of benefiting the institution.
either case, Groom Law Group suggests that the right kind of fiduciary
liability insurance can mitigate the costs of fighting these claims. The
firm warns that “over the last 10 years, the scope of so-called 401(k) ‘excessive
fee’ litigation — another staple of the plaintiffs’ bar — has expanded to the
point where every plan sponsor and plan service provider dealing with a 401(k) plan
of significant size should be on notice that it may be the next defendant in
this type of ERISA class action.”
course, all fiduciary liability insurance policies define their unique terms,
conditions and limitations. But most have a few key factors in common. For
example, coverage kicks in when the insured is facing an actual claim for a
wrongful act allegedly committed by the insured. Groom Law says, “Generally, a
claim may be a written demand for monetary damages or injunctive relief, a
civil complaint, a formal administrative or regulatory proceeding commenced by
the filing of a notice of charges or formal investigative order, or a written
notice by DOL or the PBGC of an investigation against an insured for a wrongful
this insurance can’t be used to restore losses to an employee benefit plan “when
a plan sponsor or employer discovers that it made an error.” Fiduciary
liability insurance can only defend against a claim and then “pay for any
covered award entered against the insured up to the policy’s limit of liability.”
firm adds that policy provisions “may be used to preclude coverage for
indemnity payments that constitute benefits that are payable to participants or
their beneficiaries under the terms of a plan, or that would have been payable
under the terms of the plan had it complied with ERISA.”
regardless of what protection a policy may offer, it is important to pay
attention to who exactly is protected or defined as the insured. Groom Law
points out that third-party providers such as investment advisers and
investment managers are generally not protected by a plan sponsor’s fiduciary liability
insurance. Even when relief sought is not a monetary loss, however, the
insureds may still have coverage for defense costs.
have a duty-to-defend provision that allows insureds to select their own
defense counsel. Groom Law notes that “due to the volume of the claims they
handle, fiduciary liability insurance carriers commonly negotiate lower rates with
the defense firms. The firm adds that “fiduciary liability carriers also
typically have litigation management guidelines in place that help to ensure
that the costs of defense are reasonable and necessary. These defense provisions
are important because fiduciary liability policies typically pay for defense
costs within the limits of liability, meaning that every dollar spent by the carrier
on defense costs erodes the available limit of liability by that same amount.
These types of policies are commonly referred to as eroding limits policies.”
Law Group’s report, “Who May Sue You and Why: How to Reduce Your ERISA Risks,
and the Role of Fiduciary Liability Insurance,” can be found at Groom.com.