Senior Counsel
Consider Dave, the CFO at a medium sized company with a Section 401(k) retirement plan. Like many employers, the assets of the 401(k) plan are the largest pool of funds the employer has responsibility for.
Because of the employer’s understandable concern about the management of these funds, the employer appoints Dave to run a company committee set up to manage the plan and its investments. As the chairman of this committee, Dave selects his old friend, Samantha, who works for an investment advisory firm, to manage the investment of participant accounts in the 401(k) plan. Dave has known Samantha for years and picked her for the job after a brief telephone conversation and review of the firm’s promotional brochure.
Things run smoothly for a while, but Samantha recommended a real estate investment for the 401(k) plan that goes under due to possibly criminal mismanagement after 18 months. Participant accounts incur a loss of $200,000.00. The employer is relieved to find that the plan’s loss is covered by its ERISA-required fidelity bond. So, the plan’s loss is reimbursed by the bonding company. But Dave does not fare as well. The bonding company has a right to assert the plan’s claim against Dave for breach of fiduciary duty (imprudently selecting Samantha as investment advisor and failing to monitor her activities). This liability is Dave’s personal liability and, although he may have a claim for reimbursement under the company’s by law indemnity provisions (if any), the company’s payment on any such indemnity because of Dave’s dealings with Samantha does not bode well for his career.
But what about other insurance the company may maintain? Would the 401(k) loss be covered by the company’s fidelity bond or crime coverage? And what about the company’s errors and omission coverage for officers and directors, or its employer practices liability insurance? Most likely none of those coverages would apply. The fidelity bond only covers losses from criminal misconduct and the other policies specifically exclude claims relating to breach of fiduciary duty arising under ERISA with respect to 401(k) and other retirement plans. However, if the company maintained a fiduciary liability policy specifically designed to protect the company and its employees when acting as plan fiduciaries, then the insurer on that policy would have paid the liability for losses incurred because of Dave’s failure to meet applicable fiduciary standards of conduct. So that’s why any employer sponsoring a 401(k) or other qualified retirement plan should consider whether it needs fiduciary liability insurance. Bear in mind that the employer itself is almost always a plan fiduciary because the fine print usually identifies the employer as the “plan administrator” ultimately responsible for all plan operations.
Takeaways: Number one, the ERISA-required fidelity bond protects the plan and its participants, not the employer. If the bonding company does pay a claim, it may have subrogation rights to recover its payment from the employer and/or its officers and employees responsible for plan administration. Second, by all means consider fiduciary liability insurance that is not just an add on to other policies. But there is no standard form for such insurance, so every proposal needs to be carefully reviewed and compared to other policies on the market.
Andrew S. Williams has practiced in the employee benefits and ERISA arena since ERISA was passed in 1974. He has been recognized by his peers through a survey conducted by Leading Lawyers Network as among the top 5 percent of Illinois lawyers in Small, Closely and Privately Held Business Law and Employee Benefit Law. He maintains a website, www.BenefitsLawGroupofChicago.com, with additional updates, commentary and analysis on benefits and employment topics.
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