By DAMIAN C. CARACCIOLO, vice president of CBIZ Risk & Consulting Services and practice leader for CBIZ Executive and Financial Protection Services
Virtually every move made by business owners, directors, officers and other "fiduciaries" responsible for employee pension and welfare benefits plans is regulated by the Employee Retirement Income Security Act of 1974 (ERISA).
ERISA and other rules and regulations governing employee benefits are constantly changing, and litigation involving pension plans is expected to increase as a result of more stringent oversight by regulatory agencies, industry "watch dog groups" and plan participants.
As we have seen with the recent historic declines in market value of many companies, including blue-chip stalwarts, pension plans have lost, in some cases, 50 percent or more of their value. Without going into the pitfalls that any remaining defined benefits plans face and the plan sponsors ability to fund those plans, every participant of any pension or 401(k) has shared in those losses that will take many years to recover and has lost confidence in their retirement savings vehicle.
Couple this with the recent high-profile fraud cases involving Bernard Madoff and Stanford Capital Management, along with several other smaller fraud cases, and both plan trustees/fiduciaries and plan participants have reason to pause.
In addition to this, a 2008 decision by the U.S. Supreme Court (LaRue v. DeWolff, Boberg & Associates) makes the management and administration of 401(k) plans more susceptible to claims activity by allowing single-plan participants to bring claims against their employers for failing to invest their money as directed.
All these factors signal an increase in claims and lawsuits brought by or on behalf of the plan participants.
ERISA not only sets the rules for management and administration of benefits plans, but it clearly states that plan trustees and fiduciaries can be held personally responsible if they do not meet the ERISA "standards of conduct."
No plan can contain a provision relieving a fiduciary from the personal liability they assume as plan trustees or fiduciaries.
Most plan trustees and fiduciaries are not aware of the risk they assume or incorrectly expect that the plan will "hold them harmless" as a result of serving in the capacity of plan trustee or fiduciary. This, unfortunately, is not the case.
We are also seeing plaintiffs' attorneys not only naming plan trustees and fiduciaries in their lawsuits but also the plan sponsors board and, in may cases, individual employees.
The burden of proof for compliance with all provisions of ERISA lies with the sponsor/employer. With average attorney fees of $250 per hour to in some cases $500 per hour, even frivolous allegations will be costly to defend.
Another misconception, as 401(k) plans continue to grow in popularity, is that the liability of plan fiduciaries has been completely eliminated by providing a plan that complies with ERISA section 404(c), basically allowing plan participants to exercise control over assets in their account.
Section 404(c) does in theory reduce a fiduciary's liability because participants control the assets in their retirement accounts. However, not all of their responsibilities and potential liabilities can be transferred.
Under ERISA section 404(c), a sponsor must still:
-- Provide sufficient information and education so participants can make informed decision
-- Supply at least three core investment alternatives
-- Offer investment alternatives with various levels of risk; diversification must be provided
-- Select competent investment managers
-- Routinely monitor and evaluate investment performance
-- Control costs, which are in most cases borne by the participants
-- Provide a mechanism for self-direction of participant's investments
A fiduciary's failure to comply with just one of the 20 to 25 conditions in section 404(c) may nullify any protection afforded under this provision.
WHERE INSURANCE COMES IN
ERISA law does allow the purchase of fiduciary liability insurance for the benefit of plan trustees and fiduciaries.
Although enforcement and claims activity is on the rise, and despite the fundamental flaws in the stock market and collapse of the exotic investment risk models, the market for fiduciary liability insurance is still relatively soft for those plans that do not have exposure to Madoff- or Stanford-related firms or in industries on the perceived brink of collapse.
Chubb, National Union, Philadelphia and Travelers, among others, are placing more emphasis on the due diligence and underwriting of plan sponsors and their plans (including but not limited to the plan sponsor financial condition, mix of investments including any employer securities, funding of defined benefits plans, financial health of insurance carriers providing annuities or employee benefits, reputation and strength of services providers and investment advisors, and the industry of the plan sponsor. But there is still capacity at reasonable prices.
The key, however, is purchasing the coverage before you receive notice of a potential claim or government investigations and pending suits come to fruition. This will then cost the carriers potentially millions of dollars to defend, which will ultimately be passed on to plan sponsors in the form of higher premiums and possibly more restrictive coverage.
August 1, 2009
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