If a company sponsors a retirement or health plan for its employees, then the person involved anyway with the management of that plan, is considered a fiduciary. A fiduciary is held personally liable for a breach of his fiduciary duties.
For many businesses, offering an employee benefit plan is a way to retain and retain employees. But if the benefit plan is not adequately managed, it will mean nothing if the business is faced with overwhelming litigation costs. If the fiduciary does not carry out the required obligations, he can be personally held liable. His assets may also be at risk. Hence, fiduciary liability insurance is essential for the well-being of any company and its fiduciaries.
It is the job of a fiduciary to select advisors and investments, minimise expenses and follow plan documents exactly. Here the duty lies in the sole interest of plan participants and beneficiaries and not the company. According to the fiduciary liability insurance policy, there is a lot of responsibility of the fiduciary to safeguard the interest of the people involved, and thus requires a high level of monitoring and management.
A fiduciary can be a pension fund manager, who is responsible for managing investments held in the best interest of beneficiaries. For a pension fund manager, the fiduciary liability insurance, in this case, will cover breach of fiduciary duties such as misstatements or misleading statements, errors and omissions.
The lawsuit against a company and its fiduciaries can be filed by:
- Plan participants (employees)
- The government
Fiduciary liability claims can arise due to allegations such as:
- Administrative error
- Improper advice
- Denial or reduction of benefits
- Wrongful termination of a plan
- Failure to adequately fund a plan
- Conflict of interest
- Irresponsible investment of assets or lack of investment diversity
If the management purchases fiduciary liability insurance for the company and employees engaged in fiduciary roles, the policy would not extend to any outside advisers, consultants, or administrators of the benefits plans. These providers should secure their own coverage.
Even if the company hires outside advisors to take on the plans’ fiduciary functions, it doesn’t automatically exclude the company from any associated liabilities. The company still remains responsible for monitoring the activities of the hired advisors.
Why Purchase fiduciary liability insurance?
- To avoid personal liability
- To prevent loss of plan assets
- Many Directors & Officers do not realise they are fiduciaries
- Conflict of interest between D&O duties to the company and to the plan
- Protection in the event of Merger and Acquisition
Case Study: 1
Suresh was an employee of a leading Goa-based manufacturing firm. He had announced his plans to retire and requested a pension calculation in writing. In spite of several requests, the plan administrator took over 55 days to value the plan assets.
During that time the stock market showed severe fluctuations and drops, which had a negative impact on the value of the retirement funds.
Due to the suffered loss, Suresh sued the plan administrator and the pension plan alleging an error in administration and a miscalculation of plan benefits.
The fiduciary liability insurance policy bought by the company protected the plan administrator from the allegations. The insurance company was able to settle the case with a rupees 95,000 settlement amount.
Case Study: 2
An import and export firm in Gujarat, received legal suits from its current and retired female employees claiming that their pension plans failed to account for maternity leave while calculating their time in active service.
This group of females sued the plan administrator, the plan, and the organisation. However, the import and export firm was able to settle the claim with the help of its insurance providers thanks to the fiduciary insurance policy that they had acquired. The case included rupees 5,50,000 in settlement and defence costs.