Challenges associated with the economic turmoil occurring in 2008 have driven many companies to cut back on expenses. Many cost-cutting decisions and changes can positively impact your bottom line, but they may also have a much more adverse effect on your employees, partners, investors and business. A few areas of concern highlighted in this article are fiduciary liability, employee benefits liability and directors and officers liability.
Fiduciary liability is generally an insurance coverage that holds a questionable value to many business owners and is an important coverage if you offer employees a retirement or welfare plan. Since you are choosing the plan’s third-party asset manager and the investment options available, you hold a personal fiduciary responsibility to the plan’s participants.
A fiduciary bond is required by the Employee Retirement Income Security Act of 1974 (ERISA), which protects the employer from theft of employee benefit-plan assets. However, a fiduciary bond does not protect the individual fiduciaries and the retirement plan from liability arising from errors in plan administration and breaches of fiduciary duty under ERISA. That is where fiduciary liability coverage picks up the slack.
Most employers offer defined retirement plans including employer-provided pensions, where the assets are controlled by fiduciaries and plan sponsors, or the more common “defined contribution” plans, commonly referred to as 401(k) plans.
Typically, the difference between these two is who has discretion over the investments. The pooled assets of employer-sponsored pension plans are controlled by the fiduciaries with little or no intervention by participants or employees. On the other hand, 401(k) plans are driven by the individual plan participant (the employee) who chooses the investments, sales timing and threshold for investment risk.
Fiduciaries generally believe they have no fiduciary liability exposure to participants of a 401(k) plan since the employee has virtually full control over his own individual plan. However, despite the employee’s control, these plans still have an exposure to lawsuits from the plan’s participants.
For example, participants are usually restricted to a small number of investment options chosen by the fiduciaries and/or sponsor. This creates a problem if participants feel they are not being given a good enough opportunity to place their funds into investments that should perform the way they are recommended.
Also, the plans are often managed by a third-party administrator chosen by the fiduciary and whose fees are negotiated by the fiduciaries, not the participants. This can often create a problem for the plan’s participants because they may feel they are being overcharged for administrative fees and the third-party administrator is not providing enough value or performing for what they are charging.
Lastly, fiduciaries often provide a company match to the employee’s contributions. In today’s economic environment, reductions or elimination of company matching is occurring more frequently. This could potentially be considered a breach of fiduciary duty to participants if they were not properly notified of the change. Because of these roles taken by the employer or fiduciaries, they still hold the same liability as fiduciaries of employer-provided pension plans.