Important Ways to Limit Fiduciary Liability for your Clients
Your fiduciary clients have important responsibilities and are subject to standards of conduct higher than that of professional liability, because they act on behalf of participants in a retirement plan and their beneficiaries. Under the Employee Retirement Income Security Act (ERISA) of 1974, fiduciaries could be held personally liable for breach of their duties in the administration or handling of employee benefit plans.
Many fiduciaries make assumptions that all of their personal assets are protected by their ERISA fidelity bond, and don’t investigate or purchase fiduciary liability insurance.
However, if they are an owner or officer who makes decisions about their company’s 401(k) plan or other qualified employee benefit plans, odds are that their personal assets are at risk.
The good news is that in certain situations, fiduciaries can limit their liability.
The main way for fiduciaries to show that they have completed their responsibilities appropriately is by documenting the processes used to carry them out. Their responsibilities include:
- Acting solely in the interest of plan participants and their beneficiaries and with the exclusive purpose of providing benefits to them
- Carrying out their duties prudently
- Following the plan documents, unless inconsistent with ERISA
- Diversifying plan investments
- Paying only reasonable plan expenses
By documenting and regularly monitoring the investment process, your fiduciary clients reduce the chance that they will be held liable for negligence.
Another way for fiduciaries to reduce their potential liability is for them to, set up a plan to give participants control over the investments in their accounts. This means that investment decisions are made primarily by the participants.
Under Labor Department regulations, participants must be given the chance to choose from at least three different investment options so that employees can diversify investments within a category.
Participants must also be given sufficient information to make educated decisions about the options offered under the plan, and they must be allowed to give investment instructions at least once a quarter.
Once your fiduciary client appoints an investment manager, they are not liable for the individual investment decisions of that manager. It is required, however, for fiduciaries to monitor their manager periodically to ensure that the plan’s investments are being handled prudently and in accordance with the appointment.
PLRisk Advisors can provide you with access to Fiduciary Liability insurance, which protects the insured against allegations that the fiduciary – the money or benefits handler – has breached their duty.
The accusation can focus on an error or negligence in administering a plan, including but not necessarily limited to misinterpretation of plan documents, providing imprudent investment options to plan participants, misrepresenting investments, mishandling enrollment paperwork and giving bad advice or faulty instructions to participants.
To learn more about Fiduciary insurance coverage, or to sign up as an agent please give us a call at (855) 403-5982 for more information.