Beginning in 1974, with the advent of The Employee Retirement Income Security Act (ERISA), those who manage employer benefit plans are considered fiduciaries acting on behalf of participants and beneficiaries are subject to specific standards of conduct.
The standards of conduct required by ERISA are separated into four primary categories:
- Duty of Loyalty – Be loyal to participants and beneficiaries
- Duty of Prudence – Be prudent in making decisions
- Duty of Diversify – Offer a variety of investments
- Duty to Follow Plan Documents – Adhere to plan documents
Fiduciaries agree to make decisions about employee benefits in the best interest of plan participants. The law sees the responsibility as the fiduciary’s, at times holding them personally accountable, negatively impacting their personal assets.
In prior years, retirement plans were often the employer’s primary focus and the fiduciary’s primary responsibility. Today, health benefits are becoming equally, if not more, important than retirement benefits, especially in competitive hiring sectors. On average, companies spend two and a half times more on health benefits than on retirement benefits.
Without a clear definition of the parameters of their expected role, fiduciaries are vulnerable to potential lawsuits. Two notable cases relating to these duties were recently settled:
- $354.5M settlement. The union claimed that union administrators made changes to retiree medical benefits, breaching a collective bargaining contract.
- $3.95M settlement. A group of retired workers filed a class action suit claiming the company and its group insurance plan violated ERISA by reducing their health benefits.
It’s important for fiduciaries to know their personal risk and be prepared to protect their personal assets. Even perceived negligence can have a dramatic financial impact. Although ERISA places restrictions on the ability of fiduciaries to be indemnified, purchasing Fiduciary Liability insurance is allowed and an important personal financial consideration. Fiduciary Liability insurance is an affordable and broad protection, encompassing many forms of risk for fiduciaries.
If you have not thoroughly reviewed your Fiduciary Liability insurance recently, we urge you to discuss it with your insurance broker. Similarly, if you have not had a recent review of ERISA Compliance, we urge you to discuss with ERISA counsel.