INTRODUCTION TO THE FIDUCIARIES COURSE
Welcome to the Fiduciaries course. The purpose of this course is to arm you, the insurance adjuster and insurance agent, with the relevant and adequate knowledge on matters pertaining to Fiduciaries. At the end of this Fiduciaries course, you should be capable of understanding the basics of Fiduciaries.
Please be guided that the contents of this course should only serve as guidance and an overview of the course. All the materials covering Fiduciaries cannot be exhaustively covered under the course due to its dynamic nature. You are therefore encouraged to use supplementary materials on the topic to equip yourself further.
The content of the course shall be as hereunder:
- Defining Fiduciaries
- Defining Fiduciary Liability Insurance (FLIPs)
- Costs of a Fiduciary Liability Insurance
- What is covered and what is not covered under Fiduciary Liability Insurance
- Why Fiduciary Liability Insurance is purchased
- Employee Benefits Liability Insurance (EBL) Vs Fiduciary Liability Insurance
- Errors and Omissions Insurance Vs Fiduciary Liability Insurance
- A review of relevant cases
- Wells Fargo case
- Trinity Health Hospital
- Fidelity Investments
- Merrill Lynch
- The Employee Retirement Income Security Act (ERISA)
Defining a Fiduciary
A fiduciary is a person or entity who is entrusted with the responsibility of managing the assets of another person or company. A fiduciary has a legal obligation to act in the best interests of the other party while following the highest standards of good faith and trust. Fiduciaries who fail to keep their fiduciary obligation expose themselves to legal action from people who have been damaged by their actions.
Under the fiduciary liability insurance, fiduciaries oversee and administer employee benefit plans/ programs, which are generally divided into two major categories: employee welfare plans and retirement benefit plans. An employee benefits plan is a benefit that is provided by the company distinct and in addition to the income that the employee receives. The outline and directions are provided by a written plan document. Employees’ retirement plans are intended to ensure that they will have an adequate funds when they reach retirement. Defined benefits pension plans, profit-sharing plans such as 401(k)s, stock purchase plans, and employee stock ownership plans are examples of such arrangements. Welfare benefits systems, on the other hand, might differ significantly. Medical and dental care, paid time off, disability and life insurance, as well as educational assistance programs, are all common features of welfare systems.
Under the Employee Retirement Income Security Act of 1974, every single individual listed in an employee benefit plan document by name or title, as well as anyone with discretionary decision-making authority over the administration or management of the plan or its assets, can be considered a fiduciary. This includes persons such as human resources employees, appointed or implied fiduciaries and plan administrators. Employers (who are often the plan sponsors), plan administrators, plan trustees, directors and officers, and internal investment committees are all examples of fiduciaries that are frequently encountered. Those who sponsor retirement or health plans for employees, or who are involved in any manner with the administration of those plans, are likely to be deemed fiduciaries under the laws of the United States. It is the duty of a fiduciary to pick and implement the best advisors and investments, reduce costs, and strictly adhere to the plan documents. Only plan participants and beneficiaries should be their first concern, and they have a legal obligation to do so.
Any of the following parties can file a lawsuit against a fiduciary: the Secretary of Labor, a plan participant or beneficiary, or another fiduciary in the plan. In addition, the Treasury Department and the Department of Labor have the authority to impose penalties or file lawsuits against plan fiduciaries. A fiduciary can also be held accountable for the actions of co-fiduciaries or third-party entities within the terms of the law. The plan sponsor and individual fiduciaries may be liable for claims that result from the acts of various entities that offer services to the plan. Consulting firms, professional administration firms, investment management businesses, accounting firms, legal firms, and other similar organizations are examples of the said parties
Defining Fiduciary Liability Insurance (FLIPs)
Fiduciary liability insurance is also referred to as management liability insurance. To put it simply, the policy shields entities, their officers, directors, stockholders, partners and partnerships, as well as employees who are authorized to act in the administration of any plan, when there is an event of a claim against them by former, present, or future employees, their beneficiaries, or legal representatives arising from the management or administration of employee benefit plans. If a claim is filed against the policyholder of this insurance, the insurance will pay for the legal expenses incurred in defending against the claim, as well as any financial losses the plan may have suffered as a result of errors, omissions, or a breach of fiduciary duty on the part of the policyholder. For example, in the case of employee benefit plans, fiduciary liability insurance protects persons or companies who handle those plans from accusations that they mishandled those plans in violation of their fiduciary obligation.
The insurance assists in covering the costs of a legal defense as well as any losses that may occur when the following happens: there are consequences of poor investment decisions, plan records are mishandle, and plan service providers are hired in a careless manner. When plan administrators make mistakes like these, they may be held personally accountable for any damages that plan participants, such as employees, experience as a result of their actions. When employees file lawsuits to recover the losses they have experienced as a result of a fault with their company’s retirement or health and welfare plan, fiduciary liability insurance acts as a financial cushion.
It is required that firms that offer retirement plans or other forms of employee benefits comply with federal regulations enacted in 1974, known as the Employee Retirement Income Security Act of 1974. (ERISA). According to the rule, persons in charge of managing retirement funds and other benefits have the “highest duty known to law,” which is referred to as a fiduciary duty which is perhaps even higher than the level of care required of corporation directors and officers. Any individual or company that violates a fiduciary obligation is subject to liability under ERISA. Therefore, the plan fiduciary may be held liable for and ordered to refund the financial losses suffered by plan participants.
It is important to note that neither the Employee Retirement Income Security Act (ERISA) nor any other federal statute requires that the fiduciary liability insurance be provided, but where it is so provided, it must comply with the relevant regulations.
Costs of a Fiduciary Liability Insurance
The cost of a fiduciary liability insurance plan will be mostly determined by the type of coverage a company needs, as well as the size of the firm and its assets, among other factors. The good news is that fiduciary liability insurance is usually a reasonably priced product that can be coupled to other policies such as directors and officers insurance and employment practices liability insurance. Fiduciary liability premiums are affected by a variety of factors, including the overall amount of plan assets under management, the policy’s limits, and the service providers’ quality. For the most part, plans can cost anywhere from $500 to $2,500 per year, depending on the exact demands of a business. Insurance policies can provide coverage of up to $20 million each year.
What is covered and what is not covered under Fiduciary Liability Insurance
What is covered. It is crucial to understand that fiduciary liability insurance is a relatively specialized type of coverage. The emphasis is unmistakably on the violation of obligations resulting from the mismanagement of benefits. Fiduciary liability insurance provides coverage for a broad array of fiduciary errors, including but not limited to: changes to plan benefits that are not appropriate, employees’ benefits being denied in the wrong way, the provision of erroneous or wrong advice or counsel to the plan holder, giving advice that is beneficial to the fiduciary but detrimental to the plan’s beneficiary breading a conflict of interest, prohibited transactions, making a faulty decision when it comes to picking plan service providers, failure to adequately monitor and regulate service providers, making errors and omissions when administering the strategy is a risk, and the incompetent management of plan assets, as well as the failure to diversify those assets. If these and other issues emerge, fiduciary liability insurance will cover the costs of the fiduciary’s legal defense as well as any settlements that are made, any damages awarded by the court when there is a finding of wrongdoing, and investigations into the alleged misconduct.
Four basic coverage grants will be provided by modern fiduciary liability insurance policies: violation of fiduciary responsibility; negligence in the management of the plan; voluntary compliance programs; and regulatory penalties.
Violation of fiduciary responsibility. The principal coverage granted by a fiduciary liability policy is for violations of fiduciary responsibility under the Employee Retirement Income Security Act (ERISA) or other applicable fiduciary statute. A claim for breach of fiduciary duty might result in significant exposure for the plan and the other policyholders, depending on the severity of the violation and the number of beneficiaries implicated. Most large loss payouts under fiduciary liability insurance plans have historically been made in imprudent investment instances, in which beneficiaries or other third parties argue that the trustees broke their fiduciary obligations in investing plan assets on behalf of the beneficiaries. The loss of investment principal, as well as the lost opportunity cost if the principal had been properly invested, is typically used as the basis for calculating damages in unwise investment cases. In addition, claims alleging misinterpretation of a plan document, wrongful administration of a plan in a manner inconsistent with the plan documents, providing participants in a defined contribution plan with imprudent investment options, having failed to rightfully pass on pertinent information to plan participants, or making misrepresentations concerning plan investments may all have significant liability potential.
Negligence in the management of the plan. It is also possible to obtain coverage for negligent errors in the administration of the plan, even if the errors do not constitute breaches of fiduciary responsibility under the plan’s terms. Typically, administration includes the management of paperwork and records for the plan, offering interpretations with regard to any plan (including the calculation and determination of benefits), or giving advice to plan participants on the plan. For example, the plan contract may stipulate that an employee has thirty days to enroll a newborn kid in the health insurance plan. However, the plan administration office may mistakenly advise the employee that the employee has sixty days to include the newborn when the plan only allows for thirty days. This wrong advice may cause a plan participant to delay the enrollment of a newborn in the health plan until fifty days after the date of birth, which may result in the health insurer denying any medical benefits claims. The employee could then file a lawsuit against the plan, claiming that they were given incorrect instructions on how to enroll their newborn child in the plan. This claim could be considered a wrongful act under the policy due to a mistake in the plan’s administration.
Voluntary compliance programs. Fiduciary liability insurance coverage used to cover claims only when a third party accused the insured of misconduct, not when the insured suffered a loss (first-party claims). The purpose for this is to avoid moral hazard claims, which would entail a policy coverage that would encourage people to take exceptional risks. However, in recent years, this has changed, regulatory agencies have encouraged employee benefit plans to proactively cure ERISA fiduciary violations by implementing prescribed corrective procedures.
Both the IRS and the DOL currently have active voluntary compliance programs. If one makes an error in their plan, for instance, the IRS Employee Plans Compliance Resolution System “EPCRS” encourages plans to correct errors and avoid plan disqualification as a result. Similarly, the DOL’s Voluntary Fiduciary Correction Program (VFC) permits persons who may be liable for certain ERISA-related fiduciary breaches to voluntarily request for relief from enforcement actions and penalties. The IRS also offers repair of faults uncovered during an audit, however it is not “voluntary.” This is referred to as the IRS Audit Closing Agreement Program, often known as “Audit CAP,” it permits a plan to enter into a Closing Agreement with the IRS, allowing the plan to rectify detected errors and pay a sanction negotiated with the IRS.
Many of the violations stated in a voluntary compliance application or according to an Audit Closing Agreement Program may not be compensated using plan assets except if the cost would have been paid from the plan (and assuming the plan document allows such payment of reasonable and necessary expenses to be paid from the trust). Modern fiduciary liability insurance policies address this issue by covering expenditures related to voluntary compliance programs. These expenses are subject to a policy sublimit, which is part of the policy’s overall limit, and normally ranges from $50,000 to $250,000. The insurance company effectively authorizes the insured to lodge a claim against themselves and seek reimbursement from the insurer under this sublimit of coverage.
The fines, penalties, or punishments paid to the governmental authority under an authorized voluntary compliance program should be covered by the voluntary compliance coverage, as well as the expenses of attorneys and accountants to review and investigate suspected regulatory non-compliance. In recent years, this has been the most popular fiduciary liability insurance feature. To ensure that its fiduciary liability policy has an acceptable voluntary compliance sublimit, an employee benefit plan should speak with its broker or insurance adviser.
Regulatory penalties. The majority of professional liability insurance coverage do not cover penalties. The term “loss” or “damages” is often defined to exclude any taxes, fines, or penalties that are not expressly covered by the policy. However, the challenge for fiduciaries of employee benefit plans is that they are personally liable for penalties imposed by ERISA and several other statutes, which cannot be paid out of plan assets. Fiduciary liability insurance companies have filled the gap by covering some penalties that employee benefit schemes incur. However, because the insurance will otherwise exclude all fines, a penalty will not be covered unless it is specifically mentioned as covered under the policy, generally via endorsement. Sometimes, miscellaneous fines are covered by endorsement. Most fiduciary policies will give coverage for the following sorts of penalties:
- Section 502(i) of ERISA that authorizes the DOL to evaluate a five percent (5%) civil penalty against a person in interest who participates in a prohibited transaction with respect to an employee benefit plan.
- ERISA, Section 502(l), in the event of a fiduciary violation, the DOL evaluates a civil penalty of twenty (20) percent of the amount of settlements or court orders against the breaching fiduciary or party. According to the DOL, Section 502(l) gives it no discretion in determining whether or not to impose the penalty when an investigation indicates that there may have been a violation of fiduciary responsibility.
- Section 502(c) of ERISA provides fines for claimed failures by the plan or administrator to reply to written requests for information about the plan. Section 502(c) establishes sanctions for administrators who refuse to submit needed information or who fail to give required information. In addition, the Department of Labor is entitled to assess fines of at least $100 per day, which is now adjusted for inflation every year, from the date of refusal or failure, and each violation is handled separately for the purposes of determining the amount of the penalty. 502(c) claims are frequent because many benefit claims contain a tag-along reporting allegation. Due to the reporting requirements of the Pension Protection Act of 2006, Section 502(c) has become even more valuable, as the penalties for failure to disclose are codified and can be enforced under ERISA Section 502. (c). A number of carriers refer to this coverage as “Pension Protection Act” coverage, simply ensuring that a plan includes a sublimit of coverage for 502(c) penalties will offer the essential protection.
- HIPPA. By the Health Information Technology for Economic and Clinical Health Act of 2008, (HITECH) the Health Insurance Portability and Accountability Act of 1996 (HIPAA) privacy and security regulations were expanded. To begin with, the Department of Health and Human Services (“HHS”) enforcement jurisdiction was broadened to include civil monetary penalties up to a $1.5 million yearly maximum for identical offenses. Many insurance companies will pay between $25,000 and $100,000 for HIPAA infractions.
- PPACA. Patient Protection and Affordable Care Act (PPACA), also recognized as “ACA,” and commonly referred to as Obamacare, modified and enlarged ERISA and the Public Health Service Act (PHSA) by incorporating PPACA coverage mandates for individual, group, self-insured, and fully insured employer-sponsored health plans into Section 715 of ERISA. PPACA infractions are subject to a variety of penalties, which have been enacted by various regulatory bodies. For example, the Internal Revenue Service (IRS) may levy excise fees on group health plans (including church plans) that do not comply with the PPACA insurance market reform provisions. HHS also enforces PPACA insurance market reforms against non-federal governmental plans and has the authority to evaluate penalties. This critical penalty coverage is referred to as “Health Care Reform Coverage” by some insurance companies.
- The Internal Revenue Code, or “IRC,” Section 4975. It grants the Internal Revenue Service (the “IRS”) the power to impose excise taxes on prohibited transactions, like the failure to make contributions on time. A growing importance is being placed on Section 4975 penalty coverage as the enforcement of contribution deadlines becomes more stringent.
- Social Security Death Master File Penalties. Penalties for improper disclosure of confidential social security and other information in the Social Security Death Master File are provided in Section 203 of the Bipartisan Budget Act of 2013. These penalties range from $1,000 to $250,000 per person.
What is not covered. Fiduciary liability insurance will only cover the insured company and its personnel who are acting in a fiduciary capacity. Third-parties, outside advisers, consultants, or administrators of benefit schemes hired to manage the benefit plans are not covered under this policy. “Any outside advisers, consultants, or administrators of your benefits plans … are responsible for securing their own coverage. Also, keep in mind that even if you hire outside advisors to take on your plans’ fiduciary functions, this doesn’t automatically exclude you from any associated liabilities – you are still responsible for monitoring these fiduciaries’ activities.” (Hartford). These persons should have their own set of policies in place to cover them. A certificate of insurance demonstrating that they have the necessary coverage is recommended before one engages outside assistance to administer their benefits.
It is important to note that fiduciary liability insurance does not cover criminal acts or acts of willful wrongdoing. An example of what is not covered includes fraudulent cases of theft. The fidelity bonds of a benefit plan or other small business funds are likewise not covered by this policy. Be aware that most fiduciary insurance will also exclude coverage for claims arising from a failure to fund in compliance with ERISA regulations. Insurers are reluctant to give coverage for what can be interpreted as deliberate violations of federal law. Nonetheless, preferred policies will continue to provide defense coverage in the event that such allegations are leveled.
Why Fiduciary Liability Insurance is purchased
Employees prefer to work for organizations that provide a greater choice of benefits when deciding which company to work for. Offering an employee benefit plan is a popular method of attracting and retaining employees for many businesses. However, as aforementioned, employee benefit plans, on the other hand, might expose persons to a variety of liability concerns, including the possibility of incurring significant litigation costs if one is sued for mistakes in the management of the plan. Furthermore, if the individual fiduciary fails to fulfill their responsibilities, they may be held personally accountable, and their assets may be put at risk. As a result, Fiduciary Liability insurance is critical to the financial well-being of any firm and its fiduciaries.
Organizations such as financial institutions, nonprofit organizations, private companies, and public companies are examples of institutions that should consider purchasing fiduciary liability insurance. However, there is a risk that any company that provides benefits plans faces and unlike large corporations, which are more likely to have experienced people committed to employee benefits and well-versed in ERISA law, smaller organizations are less likely to have such personnel and, as a result, may be more vulnerable to litigation. If a company is relatively tiny and does not provide benefits to its employees, it is unlikely to require a fiduciary policy but as soon as it begins giving any form of employee benefits, it should consider purchasing fiduciary liability insurance for protection.
Many forms of liability coverages exist for employers, but only fiduciary liability insurance will protect both the corporation and the individuals against fiduciary related accusations of negligence, mismanagement, or activities that do not serve the plan participants’ best interests. FLIPs are the only type of insurance that provides comprehensive protection against fiduciary liability. ERISA bonds, D&O insurance, and employee benefits liability coverage (which is typically included in regular general liability policies) are all insufficient and provide little ERISA liability coverage, if any at all, or do not provide any coverage at all.
The fact that claims are nearly always extremely expensive is one of the reasons for corporations to engage in fiduciary liability insurance coverage. Going to court and defending themselves incurs considerable expenses, and the likelihood of losing or having to settle with the plaintiff is extremely high. If one owns a thriving firm, a single fiduciary responsibility claim might cause that company to be financially crippled. Moreover, employee benefit programs, on the other hand, are typically quite complex, and mistakes can occur at any time, even when a large team is dedicated to their administration. If the fiduciary fails to follow the benefits plan exactly as it is spelled out, they may be subject to legal action. Even if a company hires outside vendors to manage its employee benefit plans, the company workers who have fiduciary responsibility or oversight of employee retirement plans will more than likely be named in an employee complaint along with the vendor.
Moreover, according to ERISA, pension or health and welfare plans are not permitted to reimburse plan fiduciaries for their legal expenditures, settlements, or judgments. This therefore means that, fiduciaries who are connected with employer plans are subject to a significant amount of personal liability if they make errors. This makes fiduciary liability insurance a critical risk reduction tool for those in charge of retirement plans and similar benefits. In the event that their professional error causes financial harm to plan participants, it prevents them from going bankrupt personally.
Fiduciary liability insurance is also essential for preserving the personal assets of fiduciaries, in addition to serving as an effective risk transfer instrument for businesses of all sizes. Plan fiduciaries who fail to fulfill their fiduciary responsibilities are subject to personal liability under ERISA Section 409. This means that fiduciaries may be required to personally compensate for any losses they cause by depleting their own personal financial resources.
Another reason for taking up the insurance is that even if a firm intends to indemnify its fiduciaries, it may not be able to do so due to financial constraints, or it may be prohibited from doing so by applicable legislation. To make matters worse, the Employee Retirement Income Security Act (ERISA) creates a wide net of liability that entraps persons by determining them to be fiduciaries based on their conduct (i.e., functional fiduciaries), even if they are not called fiduciaries. This means that one could be acting as a plan fiduciary without even realizing it.
Fiduciaries are prohibited by law from abdicating their fiduciary responsibilities by delegating them to third-party service providers. Fiduciaries are still responsible for selecting and monitoring these service providers in a prudent manner, the fiduciaries’ protection is thus paramount.
Employee Benefits Liability Insurance (EBL) Vs Fiduciary Liability Insurance
Let us briefly compare employee benefits liability insurance and fiduciary liability insurance. Employee benefits liability insurance is a form of insurance that gives coverage emanating from
errors or omissions in the administration (described as counseling employees, interpreting benefits, handling of records and enrollment, termination or cancellation of employee’s benefits…etc.) of employee benefit programs. Failure to alter the beneficiary on a life insurance policy, for example, or to enroll an employee in the company’s medical plan are both examples of such errors and omissions. In addition to other policy exclusions, it excludes claims based on the failure of any investment to perform as represented by an insured, advice given by an insured to participate in any employee benefit plan, insufficient funding, failure of an insurer to perform, and ERISA-imposed liability on a fiduciary.
On the other hand, and as already discussed, fiduciary liability insurance is a sort of insurance that protects fiduciaries from legal liability in the event that they are held liable for an unlawful act defined as a breach of fiduciary duty imposed by ERISA or similar common or statutory law. It will handle claims for damages resulting from bad investments, plan and staff advice, insufficient funding, and an insurer’s failure to perform. Failure to invest plan assets prudently or pick a competent service provider for a covered plan are two examples. Some fiduciary liability policies may also cover negligent acts, as well as errors or omissions in employee benefit plan administration.
When it comes to the persons covered, under the fiduciary liability insurance, the business organization that sponsors the covered plans, as well as the individuals who serve as fiduciaries for the plans, are all subject to fiduciary liability. This is the only coverage that will safeguard plan trustees and decision-makers’ personal assets in the event of a loss. The business organization and their personnel who are authorized to administer their employee benefits program are both included under in the employee benefits liability insurance.
Having looked at the two types of insurance, we note that there is a difference between the two in that for the employee benefits liability insurance, although it provides coverage for claims arising from employee plans, it is restricted to administrative errors. It does not apply to breaches of fiduciary duty, such as making unwise investments or other similar actions. It is customary for this coverage to be an endorsement to a general liability policy.
Moreover, Fiduciary liability can be purchased as part of a package that includes other management liability coverages or as a standalone policy. The restrictions apply in the aggregate. Coverage is based on the number of claims filed; a retroactive date may apply, and there is usually no deductible. An umbrella policy does not provide coverage. In contrast, employee benefits liability is given either under a separate policy or as an endorsement to the employer’s commercial general liability (CGL) policy. The limits apply to each employee and in the aggregate. Typically, coverage is provided on a claims-made basis, with a retroactive date and a $1,000 deductible for each employee. Under an umbrella policy, coverage can be added. Another thing, is that the errors in administration coverage provided by EBL is frequently more limiting than the errors in administration coverage provided by FLIP.
Errors and Omissions Insurance Vs Fiduciary Liability Insurance
Errors and omissions insurance (E&O) is a sort of professional liability insurance that covers businesses, their employees, and other professionals from claims against their dispensation of their professional services. This includes: negligence, errors in services given, omissions, misrepresentation, violation of good faith and fair dealing, and inaccurate advice. Up to the amount specified in the insurance contract, it covers: attorney’s expenses, which can range from $3,000 to $150,000 in cost on average, court expenses, such as the cost of reserving a courtroom or paying for expert witnesses, administrative costs associated with putting together a defense, such as paying for office managers and court reporters, and settlements and judgements, which can range from a few thousand dollars to several million dollars.
Errors and omissions insurance is only beneficial in the following situations: it is submitted during the policy period or during the extended reporting period, and the incident occurred on or after the retroactive date. Accordingly, the retroactive date means that to occurrences that occur on or after a specific date specified in the insurance are qualified. It is possible to file a claim within a specified length of time after the insurance has expired if there is an extended reporting period.
This type of liability insurance is typically necessary for businesses that provide professional advice or services, including but not limited to financial services, insurance agents, doctors, lawyers, wedding planners, accountants, engineers and engineering firms, advertising firms, educators, marketing firms, website developers, consulting companies, barbershops and hair salons, printing and publishing companies, and pet services, such as veterinarians and pet groomers.
If one does not have errors and omissions insurance, the costs of liability claims might become so high that they could force a company out of business entirely. Regardless of whether the consumer dismisses their claim, the legal bills could still reach thousands of dollars. If one is found to be at fault or agree to settle the claim outside of court, they should expect to pay a significant sum of money out-of-pocket in addition to their legal fees thus in order to preserve the company’s assets, one should consider purchasing errors and omission coverage. Without E&O insurance, a company could be held liable for millions of dollars in damages as well as the costs of obtaining and retaining a legal representation. E&O insurance can assist to reduce or even remove these risks.
Depending on the contract and issuing insurance provider, E&O insurance provides a wide range of benefits to businesses and people. Temporary employees, claims arising from work done before the policy was in effect, and claims in different jurisdictions may or may not be covered by E&O insurance. These plans do not cover criminal prosecution or some non-listed obligations in the policy that may arise in civil court.
Because every organization has its own set of requirements, its errors and omissions insurance will have a pricing that is tailored to its needs. The cost of a policy is determined by several criteria, including the type of business covered, coverage limits, its location, and any previous claims paid out. An individual or entity with a history of legal issues faces a higher underwriting risk, making E&O insurance more expensive or less advantageous. E&O insurance might cost between $500 and $1,000 per employee each year on average. Rates will almost certainly vary based on where the company is located. For example, if the business is located in a busy location, the insurance premiums may be higher. The greater the insurance limitations are, the more coverage one will have, and the higher the premiums will be as a result. If the insured works in a high-risk industry, they will almost certainly have to pay a higher premium, for example, for a business that deals with financial consulting based on millions of dollars in investments, its premium will undoubtedly be larger than the premium for a smaller financial advisor. Businesses try to reduce their errors and omissions insurance premiums by among others: employee education and training, performing a quality control on their contractual system, and keeping in touch with clients on a frequent basis to ensure that they are satisfied.
If a claim arises from an event that occurred before the policy’s retroactive date, errors and omissions insurance will not assist in resolving the situation. It also offers nothing to assist a company in the event that a claim is lodged after the policy’s extended reporting period has expired. Keep in mind that errors and omissions insurance does not cover all types of liability claims.
This insurance will not assist a company in the event of a claim for:
- Illegal acts and intentional wrongdoing, such as purposefully breaching the law or misrepresenting to customers or clients.
- Any bodily injury or property damage that the company is responsible for. A general liability insurance coverage will cover one in the event of these types of claims.
- Employee diseases or injuries that are caused by their jobs. A workers’ compensation insurance coverage can provide the employees with benefits to assist them in recovering from an injury or sickness that occurred at work. Several states require one to carry this coverage if they have employees.
- Discrimination or harassment in the workplace complaints filed by employees. Obtaining employment practices liability insurance help in protection from these types of lawsuits in the future.
Many individuals believe that fiduciary liability insurance is similar to errors and omissions (E&O) insurance. This is especially so from reviewing the coverage offered by the two. Fiduciary liability insurance protects fiduciaries from accusations asserting the following: errors in managing plans, such as inappropriate enrollment or termination, which result in benefits being lost or being calculated incorrectly, when managing health or welfare plans, errors in counseling that result in benefits being lost or being paid incorrectly, giving employees’ retirement plans bad or negligent guidance on how to invest their funds, involving oneself in high-risk investments in a defined benefit pension plan, wrongful rejection of benefits or unlawful modification of benefits, and premature choice of or supervision of third-party service providers whereas Errors and omissions insurance (E&O) covers businesses, their employees, and other professionals from claims against their dispensation of their professional services as aforementioned. However, having looked at the two types of insurance, we may deduct that there is a difference between them, in that fiduciary liability is not covered by E&O insurance because E&O insurance is designed to cover the insured’s interactions with its customers rather the insured’s employees. The exception to this is if the insured is a professional in the business of acting as a fiduciary.
A review of relevant cases
Wells Fargo case (Meiners v Wells Fargo & Co et al, U.S. District Court, District of Minnesota, No. 16-03981). It was claimed that Wells Fargo & Co WFC.N diverted more than $3 billion in employee retirement contributions into pricey, underperforming proprietary mutual funds to enrich itself, prompting a lawsuit against it. The corporation was accused by the employees of failing to fulfill its fiduciary obligations to all 401(k) participants during a six-year period. It was filed in federal court in Minnesota, accusing Wells Fargo of “self-dealing and imprudent investing” by diverting 401(k)contributions to its Wells Fargo Dow Jones Target Date funds. Target date funds, also referred to as lifecycle funds, combine mutual funds that invest in stocks, bonds and cash, shifting the mix based on investors’ anticipated retirement dates. Wells Fargo was the third-largest bank in the United States at the time of the filing.
Employees led by John Meiners, of St. Louis, filed the lawsuit against Wells Fargo in an attempt to reclaim extra fees and unrealized profits coming from the bank’s claimed breach of fiduciary obligations to all 401(k) participants over the course of the six years, according to the complaint. Specifically, the complaint claimed that Wells Fargo’s target date funds were 2.5 times more expensive than comparable funds from competitors such as Fidelity Investments and Vanguard Group. John Meiners asserted that the disparity resulted from the inclusion of an additional set of costs to administer the funds on top of the fees charged to manage the underlying indexed funds. Assets soared despite this, according to the lawsuit, in part because Wells Fargo made its target date funds a default investment option and made enrolling in them simple and quick. According to the complaint, this produced large income for Wells Fargo and provided important seed money that kept the funds afloat by boosting market share. If Vanguard target date funds had been used, Meiners estimates that employees then could have earned an additional $323 million in returns during the five-year period ending June 30. As per the complaint, Wells Fargo 401(k) plan had around $35 billion in assets and more than 350,000 participants then.
Trinity Health Hospital. An employee group filed a lawsuit against Trinity Health Hospital alleging that the hospital misclassified its pension schemes, causing the pension to be underfunded by $139 million. The hospital agreed to pay $107 million to resolve the complaint. Carol Kemp-DeLisser, the pension participant who brought the class-action litigation, contended that St. Francis Hospital and Medical Center, owned by Trinity Health Corp., incorrectly designated its pension plan as a “church plan” Which were not subject to the federal Employee Retirement Income Security Act (ERISA), which protected employees by requiring that pension plans be insured and appropriately financed. Kemp-DeLisser contended that St. Francis failed to adhere to ERISAs basic finding standards.
St. Francis, on the other hand, maintained that because it is linked with and managed by the Catholic Church, its pension plan qualifies as a church plan and is therefore exempt from the provisions of the Employee Retirement Income Security Act (ERISA). As part of the settlement, the Hospital committed to contribute an additional $17 million to its employee pension after the settlement approval. It was to make further $10 million per year contribution for the following nine years. St. Francis denied any wrongdoing and asserted that its pension plan is a church plan immune from the provisions of the Employee Retirement Income Security Act (ERISA). In a statement, St. Francis noted that it “remains committed to ensuring our retirees and their beneficiaries receive their benefits under all of our retirement plans.”
Fidelity Investments. A lawsuit was brought against Fidelity Investments and its parent company, FMR, in which the business’s 401(k) plan fiduciaries were accused of, among other things, self-dealing. The lawsuit not only criticizes Fidelity’s use of all proprietary funds in its 401(k) investment lineup, but it also accuses the company of failing to negotiate for revenue sharing rebates, failing to use the lowest-cost share classes, failing to investigate alternative investment vehicles, and failing to evaluate stable value fund options when its money market funds underperformed. The complaint stated in part that “For financial service companies like Fidelity, the potential for imprudent and disloyal conduct is especially high, because the plan’s fiduciaries are in a position to benefit the company through the plan’s investment decisions by, for example, filling the plan with proprietary investment products that an objective and prudent fiduciary would not choose,”.
Fidelity’s mutual fund business, according to the complaint, was promoted by plan fiduciaries at the expense of the plan and its participants. As alleged in the lawsuit, the defendants loaded the plan primarily with investments affiliated to by Fidelity without exploring whether plan participants would have been better served by investments managed by unaffiliated firms. Moreover, the plan had practically every non-identical Fidelity mutual fund in its investment lineup which were hundreds in total, “many of which were inappropriate offerings due to their poor performance, high fees, lack of diversification, or speculative nature.”
According to the lawsuit, Fidelity’s plan had the worst performance, almost three times worse than average, among the 20 defined contribution plans with more than $5 billion in assets for which necessary data was available, due to the its failure to manage the plan in accordance with their Employee Retirement Income Security Act (ERISA) fiduciary duties. When compared to the average plan, this represented an annual loss of more than $100 million dollars. According to the lawsuit, the defendants were aware that their actions were illegal because they had settled a similar claim four years prior. Fidelity however did not admit to any wrongdoing in the settlement deal.
Although the Fidelity 401(k) plan was one of the top 20 largest private-sector defined contribution plans in the United States, according to the complaint, it failed to properly employ the plan’s bargaining power to lower costs, and because of this, plan participants paid significantly higher fees than participants in similar plans. As of the end of 2016, the plan had undoubtedly the highest fees among the about 110 defined contribution plans with assets of more than $5 billion. The plan’s fees were 0.58 percent of assets, which was more than double the asset-weighted average of 0.24 percent and a full 0.10 percent higher than the fees charged by its closest peer. If the plan’s fees had merely been the same as the average for plans with more than $5 billion in assets, total fees would have been $47 million cheaper in 2016 alone as provided in the complaint.
The plaintiffs claimed that Fidelity unnecessarily increased average plan fees by adding every Fidelity fund under every asset class. For instance, as of the end of 2015, the plan comprised six different funds inside the Diversified Emerging Markets Morningstar Category, with a different set of charges. The plaintiffs claimed that the defendants failed to evaluate whether the increased costs of each of these duplicative, more pricey options were justified, thus breaching their fiduciary duties.
Fidelity was accused of duplicating and superfluous offering of Fidelity sector funds, as well as of mismanaging some of the funds. According to the complainants, none of those sector funds provided any value to participants in terms of diversity, they were not favorable to the application of a prudent investment plan by participants, and they were more pricey than diversified alternatives. Furthermore, the complaint stated that there were years and, in some cases, decades of proof that Fidelity’s managers were unable to deliver competitive returns in certain asset classes.
It is asserted in the lawsuit that had the fiduciary defendants done such an investigation, they would have easily discovered better-managed options and that a responsible and loyal fiduciary would have eliminated funds that had consistently underperformed, so saving participants millions of dollars.
In addition, it was alleged that the defendants also failed to investigate whether lower-cost marketplace options were available. For example, the plan provided access to all eight of Fidelity’s mutual funds that were part of the High Yield Bond Morningstar Category. The fees charged by these funds ranged from 0.67 percent to 1.02 percent. The case contrasts them with market-place options, which charge fees ranging from 0.13 percent to 0.49 percent, according to the complaint.
The lawsuit accuses Fidelity of failing to conduct a thorough investigation into non-mutual fund options such as collective trusts and separate accounts, despite the fact that the firm provided its institutional clients with collective trust and separate account products that are either similar to or identical to the mutual funds in the plan. It is claimed in the lawsuit that ““Had an adequate investigation occurred, the fiduciary defendants would have switched the plan’s investments to such vehicles in light of the enormous cost savings as well as the lack of benefit from the mutual fund structure,”.
The defendants were accused that they failed to conduct a thorough investigation into the availability of lower-cost share classes of several of the mutual funds included in the plan.
In particular, the plaintiffs claimed that the defendants failed to employ lower-cost K shares of the Fidelity-branded funds and failed to utilize lower-cost Z shares of the Fidelity Advisor-branded funds in some instances. The plan, for example, employed the standard no-load form of the Fidelity Emerging Markets fund, which had charges of 0.96 percent per year, despite the fact that K shares of the Fidelity Emerging Markets fund would have cost participants only 0.81 percent per year, according to the complaint.
It is alleged that the defendants failed to demand revenue sharing rebates from the investment manager that oversaw all of the Fidelity plan’s investments, or the affiliated entity that made the payments, Fidelity Investments Institutional Operations Company (FIIOC), despite the fact that FIIOC made similar payments to the majority of the company’s other retirement plan customers. The complaint provided that “Had the fiduciary defendants simply negotiated a contract in line with Fidelity’s recordkeeping contracts with other retirement plans, revenue sharing rebates from 2015 and 2016 would have covered Fidelity’s standard recordkeeping charges (which would have been between $1 and $1.5 million per year, given the number of participants), with an excess of approximately $31.5 million per year that could have been refunded to participants,”
The lawsuit also asserted that, throughout the relevant period, the plan’s capital preservation options were consisted solely of money market accounts affiliated with Fidelity, which had earned little interest due to the structural disadvantages associated with money market funds when contrasted to other capital preservation options. It was stated that, Fidelity failed to include its stable value fund in the plan since that would constitute a prohibited transaction for which no exemption would be available. The plaintiffs, on the other hand, contend that Fidelity should have investigated nonproprietary stable value offerings in the marketplace, which would have disclosed the presence of stable value vehicles that garnered significantly better returns than the proprietary money market funds in the plan while posing comparable or lower risks.
It was highlighted in the complaint that, for a couple of years prior to 2012, Fidelity made contributions based on their discretion, to participant accounts equal to 10 percent of participants’ compensation. The plan’s Form 5500 showed that Fidelity continued to make discretionary contributions equal to 10 percent of participants’ eligible compensation in 2012, but that a portion of this contribution was now characterized as a “refund” of investment management fees that participants had paid the previous year. The lawsuit, on the other hand, claims that this refund was in actuality “a poorly-disguised gimmick that provided no benefit to plan participants.”
As highlighted in the complaint “Fidelity took money that it was going to contribute anyway and recharacterized a portion of it as a fee ‘refund.’ Thus, for every dollar in investment management fees that Fidelity gave back to plan participants, Fidelity reduced its profit sharing contribution to participants by the same amount.”
Merrill Lynch. In the aftermath of a class action lawsuit alleging that Merrill Lynch violated its fiduciary duty by charging excessive 401(k) fees. The corporation was exposed to a $25 million settlement obligation. The case was on retirement accounts that LAAD Retirement Plan and the LAAD Corp. S.A. Money Purchase Retirement Plan held with Merrill Lynch, Pierce, Fenner & Smith Inc.. Merrill Lynch allegedly abused its ERISA fiduciary duties on smaller retirement plans by charging extra fees on mutual fund purchases that were supposed to occur at a discount according to the retirement plan trustees. Failure to pass on mutual fund sales fee waivers was the subject of this case.
The class action settlement was initiated by the trustees of two retirement plans in the Miami region, and Merrill Lynch was ordered to pay $25 million in the case that was filed in the United States District Court of the Southern District of Florida after litigating for a period of two years. On Nov. 28 2017, the plaintiffs, trustees for the LAAD Retirement Plans, sought a federal judge in the Southern District of Florida to give them the final approval of the settlement. On Dec. 13 of that year, a fairness hearing was held, and on Dec. 18 2017, the judge authorized the settlement arrangement.
The lawsuit was brought on behalf of two LAAD plans in 2015, who believed Merrill’s $79 million reimbursement to thousands of small business retirement customers, which included a portion of a FINRA fine, was inadequate. Merrill acknowledged its inability to offer necessary sales charge waivers for mutual fund purchases for some charities and retirement accounts in a letter of acceptance, waiver and consent with the Financial Industry Regulatory Authority (FINRA) in June 2014.
Class A shares of mutual funds typically have lower costs than Class B and C shares, although customers pay an initial sales charge. For retirement accounts, several mutual funds forgo their upfront sales charges, and some even waive these charges for charities. At the time, Merrill Lynch did not waive the sales charges for affected consumers when it offered Class A shares at various times since at least January 2006, according to FINRA. As a result, about 41,000 small-business retirement plan accounts and 6,800 charities and 403(b) retirement accounts paid sales charges for Class A shares or paid higher fees and expenses for other share classes.
Merrill made two sets of remediation payments to most of the accounts of current and former customers involved, one voluntarily and the other in response to the FINRA letter. According to the lawsuit, the remediation payments totaled around $79 million. The trustees of the LAAD Retirement Plan, fearing that their remediation payments were inadequate, asked Merrill to explain the technique used to compute their remediation. When they didn’t get a befitting reply, they filed a lawsuit under ERISA alleging violations of fiduciary duties. They demanded the disgorgement of profits gained by Merrill as a result of the sales, in addition to a complete remediation. The settlement deal they struck with Merrill comprised a minimum $8.8 million remediation payment, which includes the defective remediation payments and interest, as well as an extra $16 million in disgorged profits recovery. The settlement also included attorney’s fees equivalent to 35% of the settlement sum ($8.75 million), plus litigation expenses (approximately $223,000) and the case contribution fee ($150,000), from the settlement amount.
The Employee Retirement Income Security Act (ERISA)
Employee Retirement Income Security Act (ERISA) is a federal law that was passed in 1974 to see to it that employees who take part in benefit plans, whether pension plans or welfare plans, receive the benefits that are promised by such plans. As above-mentioned, employers are not required to provide these benefits to their employees under the terms of the law. Instead, it oversees the plans after they’ve been implemented to ensure that they meet specified requirements. Employers who provide employee benefit programs are now exposed to fiduciary liability under the Employee Retirement Income Security Act of 1974 (ERISA). It was as a result of this that fiduciary liability insurance became widely available in the mid-1970s. One of the reasons that some organizations are unaware of fiduciary liability insurance is because the Employee Retirement Income Security Act (ERISA) does not mandate it.
An employee benefit plan, as defined by ERISA, is significantly broad, it may encompass any plan, fund, or program that is established or maintained for the aim of providing employee benefits to its participants or beneficiaries, this definition is provided under ERISA, as “any one plan, fund or program established or maintained for the purpose of providing to its participants or beneficiaries employee benefits.”
The laws and regulations of (ERISA) contain significantly strict criteria for fiduciaries of plans that are subject to ERISA jurisdiction. In accordance with ERISA requirements, the following types of plans are subject to its regulation: 401(k) plans, pension plans, profit-sharing programs, and employee stock ownership plans (ESOPs), disability insurance, group health, and group life.
Notwithstanding the fact that (ERISA) does not require employers to offer benefit plans to their employees, it does set up minimum standards for such plans, such as a clear code of conduct for fiduciaries who are in charge of managing and supervising employee benefit plans and programs. Section 409 of the Employee Retirement Income Security Act of 1974 (ERISA) provides that both employers (the plan sponsors) and outside providers recruited in a fiduciary position may be subject to severe liabilities. In the event that a plan is not managed correctly and/or benefits are lost as a result of employees not receiving enough information or guidance, fiduciaries may be held “personally liable” to “make good” any losses that they are responsible for. They range from legal claims stemming from improperly invested pension funds to allegations of failing to tell employees about their eligibility for coverage for medical procedures or other welfare benefits.
When explaining the extent of what qualifies a person as a fiduciary, the Employee Benefit Security Administration writes in “Meeting Your Fiduciary Responsibilities” (February 2012) that: “Many of the actions involved in operating a plan make the person or entity performing them a fiduciary. Using discretion in administering and managing a plan or controlling the plan’s assets makes that person a fiduciary to the extent of that discretion or control. Thus, fiduciary status is based on the functions performed for the plan, not just a person’s title.” This is to say that ERISA is concerned with what people perform with respect to a plan, rather than what their job title may be. Anyone who has discretionary authority or control over a plan’s management or assets must be held accountable under the Employee Retirement Income Security Act (ERISA).
ERISA Bonds vs Fiduciary Liability Insurance. Although the phrases “fiduciary bonds” and “ERISA bonds” are frequently used interchangeably, they are not the same thing. Fiduciary liability insurance will protect the plan’s administrators, while ERISA bonds will protect the plan itself.
The employee benefit programs are also protected under ERISA through ERISA bonds. Under Section 412(a) of the ERISA law, ERISA bonds are needed. They’re not the same as fiduciary liability insurance coverage. When dishonest administrators or trustees have caused financial harm to an employee benefit plan, this type of insurance can be used to compensate the plan’s beneficiaries, it provides first party coverage that is meant to protect the plan and its participants. The plan and its participants are protected by bonding any employee who handles funds or any other property of the plan, so shielding the plan from the risk of loss resulting from fraud or dishonesty on the part of those employees who are bonded. These bonds may only be used for the advantage of the plan and its beneficiaries. Unlike fiduciary liability insurance, this bonding insurance will not protect the trustees themselves from liability claims, and is therefore wholly distinct from it.
Additionally, ERISA mandates a bond in the amount of at least 10% of the assets under management, subject to a minimum of $1,000, must be obtained by each plan sponsor. The maximum bond amount per sponsor is $500,000, or $1,000,000 in the case that the plan does hold employer securities. The purpose of this bond is to prevent fiduciaries or persons who handle plan funds from among others squandering or mishandling the plan’s assets. In the case of employee benefit programs, fiduciary liability insurance protects corporations and individuals against claims of errors, omissions, and “breach of fiduciary duty” in the management and administration of the schemes. Unintentional failures or lapses by a corporation or its personnel who are in charge of the management or oversight of these corporate programs are particularly covered by this insurance policy. ERISA fidelity bonds, on the other hand, safeguard plan participants against fraud, theft, and other intentionally fraudulent activities by fiduciaries that result in financial losses to an employee benefit plan.
It is possible to obtain coverage under a fidelity bond for intentional acts of fraud or theft from a plan when someone acting as a fiduciary. Although claims of carelessness, inadequate oversight, and other violations of fiduciary responsibility are essentially “illegal” under the Employee Retirement Income Security Act (ERISA), they are not deliberately fraudulent. Although ERISA does not mandate the purchase of fiduciary liability insurance unlike it does with a bond, every fiduciary of an ERISA is encouraged to strongly consider getting the coverage.
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