Frequently Asked Questions about
ERISA and Fiduciary Insurance
“The Employee Retirement Income Security Act of 1974 protects the retirement assets of Americans by implementing rules that qualified plans must follow to ensure that plan fiduciaries do not misuse plan assets.”
- What is ERISA?
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- What is the function of ERISA law?
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- Which benefit plans fall under ERISA law?
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- Who is considered a Fiduciary under ERISA law?
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- What are Fiduciaries’ requirements under ERISA?
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- What are Fiduciaries’ exposures under ERISA?
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- What is a Co-Fiduciary under ERISA?
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- What qualities should an employer look for in a Co-Fiduciary?
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- What are some common mistakes made by employers under ERISA?
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- Are ERISA claims increasing?
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- Does my fiduciary bond cover my fiduciary exposure?
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- Is there a difference between an ERISA bond and fiduciary liability policy?
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- What is a fiduciary liability policy?
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- What can fiduciary insurance policies cover?
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- What is the difference between fiduciary liability insurance and employee benefit liability (EBL)?
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- Do I need a fiduciary liability policy?
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- I’ve been told this is an expensive policy to purchase. Is this correct?
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- We don’t have any exposure; we have turned over all investment decisions to our bank, insurance company agent, or other professionals. Are we correct?
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- Isn’t this coverage included in our Directors and Officers Policy or Employment Practices liability Insurance?
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- How do we find out more about fiduciary liability insurance?
What is ERISA?
In 1974 Congress passed a law called the Employee Retirement Income Security Act (ERISA). ERISA was created in response to abuses of benefit administration and retirement programs.
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What is the function of ERISA law?
The ERISA law regulates the administration of pension and welfare benefit plans offered by private employers. Under ERISA law business entities that administer, design, evaluate, manage and have discretionary control over the plan’s administration or the investment of plan assets are called "Fiduciaries".
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Which benefit plans fall under ERISA law?
There are two broad categories of benefit plans falling under ERISA: Retirement Plans including: defined benefit pension plans, profit sharing such as 401(k)s , stock bonus plans and even employee stock ownerships plans (ESOP)
Welfare Plans: medical dental, life and disability
The scope of ERISA law is quite broad.
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Who is considered a Fiduciary under ERISA law?
A Fiduciary is any person who...
“exercises any discretionary authority or discretionary control in managing the plan or who has any authority or control in managing or disposing of its assets; renders investment advice for a fee or compensation with respect to any monies or other property belonging to the plan; or has any discretionary authority or responsibility in administrating the plan.”
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What are Fiduciaries’ requirements under ERISA?
“Fiduciaries are required to perform their duties solely in the interest of the plan participants and their beneficiaries. Fiduciaries must exercise the care, skill, prudence, and the diligence of a prudent person who is acting in a like capacity and is familiar with such matters. This is a commonly referred to as the "prudent expert" rule. Erisa requires that the fiduciary be an expert in his or her duties, not just a "prudent person".
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What are Fiduciaries’ exposures under ERISA?
Fiduciary liability is personal, absolute and unlimited. ERISA made fiduciaries personally liable for their actions.
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What is a Co-Fiduciary under ERISA?
A Co-Fiduciary might be a third party administrator (TPA), a professional consulting firm, or outside service provider (OSP) that exercises discretion over the management or administration of a plan, or provides investment advice for a fee.
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What qualities should an employer look for in a
Co-Fiduciary?
A Co-Fiduciary should be financially stable and have a strong professional reputation. A Co-Fiduciary should have a proven track record of performance and experience in dealing with ERISA issues. The Co-Fiduciary should maintain and have adequate limits of professional liability insurance.
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What are some common mistakes made by employers under ERISA?
"Promised" coverages or benefits or promised performances are at the core of most ERISA lawsuits. In recent years, there has been an increase in the number of suits involving the management and misuse of plan assets.
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Are ERISA claims increasing?
Litigation against employers stemming from their failure to provide benefits or their mismanagement of employee benefits plans are on the rise. A recent survey conducted by Tillinghast, Towers, and Perrin shows the frequency of claims has doubled since 1993.
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Does my fiduciary bond cover my fiduciary exposure?
Although nearly 50% of Fiduciaries think their ERISA mandated fidelity bond protects personal assets, it does not. The fidelity bond protects the plan from loss due to dishonest acts of those who handle plan assets.
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Is there a difference between an ERISA bond and fiduciary liability policy?
Yes, you are required by ERISA to bond or insure your plans from employee dishonesty in the lesser of $500,000 or 10% percent of all plan assets. The Department of Labor has the authority to prescribe a bond in excess of $500,000, up to 10% of the value of all plan assets as of the beginning of the plan year. Fiduciary liability is not required by ERISA.
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What is a fiduciary liability policy?
A fiduciary liability policy protects the personal assets of a plan Fiduciary due to allegations of breach of fiduciary duties.
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What can fiduciary insurance policies cover?
- Breach of fiduciary duties
- Negligent errors and omissions
- Improper disclosures to plan participants
- Remiss investment advice
- Imprudent choice of outside service provider (OSP)
- Faulty advice of counsel
- Improper amendments to plan documents
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What is the difference between fiduciary liability insurance and employee benefit liability (EBL)?
Both policies cover administrative errors and omissions; however the EBL policy does not cover ERISA violations. Some companies have added the employee benefit liability endorsement (EBL) to their commercial liability policy (CGL). This approach leaves a gap in coverage for ERISA law claims.
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Do I need a fiduciary liability policy?
Yes, just as businesses need to control property exposures, work place injuries and other risks inherent to business in general, there is also need to "manage" one’s employee benefit programs. The unprepared employer may find itself being sued for providing incorrect or misleading information to an unhappy employee.
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I’ve been told this is an expensive policy to purchase. Is this correct?
The question is, can you afford not to purchase a fiduciary liability policy. It is less expensive to purchase a fiduciary liability policy than to retain a competent ERISA defense attorney [where claims can get into the millions of dollars].]
We don’t have any exposure; we have turned over all investment decisions to our bank, insurance company agent, or other professionals. Are we correct?
Plan Fiduciaries can never completely insulate themselves from liability. Plan Fiduciaries can take steps to reduce their personal liability, however ultimately they are responsible for the management and administration of the benefit plan.
Isn’t this coverage included in our Directors and Officers Policy or Employment Practices liability Insurance?
Look carefully, most other policies exclude fiduciary liability exposures as well as those exposures pertaining to ERISA.
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How do we find out more about fiduciary liability insurance?
We can provide additional information and the appropriate application forms. Contact Us.
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“The time has come to move the focus of pension plan governance out of the human resources department and beyond compliance with tax laws. The executive level suite needs to focus on pension plan governance itself, especially the responsibility and liability of pension plan fiduciaries.”
Secretary of Labor Elaine L. Chao
May 28, 2004
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