Employers: Do you understand your fiduciary responsibilities?

September 20, 2016

Your employee benefits packages are the backbone of your recruiting and retention efforts. But sponsoring a group health or retirement plan is becoming an increasingly risky venture with the rise in lawsuits alleging breach of fiduciary responsibility.

Just ask Lockheed Martin Corporation. In February 2015, they agreed to pay $62 million to settle a lawsuit by employees who accused the company of mismanaging their 401(k) retirement plan. More than 108,000 plan participants represented in the lawsuit contended, in part, that Lockheed concealed excessive fees that were imposed on plan participants and ultimately chilled investment returns, and invested too conservatively, also resulting in diminished returns. The settlement was the largest ever in a case alleging excessive fees in 401(k) litigation.

That case was just one in a recent wave of 401(k)-related lawsuits against financial firms and other companies for alleged mismanagement and inappropriately high fees. These cases are highlighting the increasing seriousness of the fiduciary responsibilities of those acting on behalf of plan participants and their beneficiaries. Cases are now expanding beyond retirement plans into the realm of group health benefits as well.

Do you understand the fiduciary responsibilities that go along with sponsoring a benefits plan?

Fiduciaries have strict standards of conduct they must meet under the Employee Retirement Income Security Act (ERISA). The basic fiduciary responsibilities include:

  • Duty to act prudently. Because fiduciaries act on behalf of plan participants, it’s their responsibility to exercise good judgment, care, and wisdom. They need to have expertise in a variety of functions such as investments, or hire someone with that expertise. If outsourcing, it’s vital to document the process to demonstrate duty of care. But it doesn’t end there. Fiduciaries still need to regularly monitor the service provider’s performance, evaluate notices received, check on fees charged, and address employee complaints.
  • Duty to follow the plan documents. The plan document is the main roadmap for the day-to-day plan operations, outlining key elements such as eligibility, contribution limits, vesting, and distributing plan assets. Fiduciaries need to be familiar with plan documents and make sure those documents stay current. Failing to amend a plan document in a timely manner for changes in federal tax laws can affect the plan’s tax-qualified status. Plan documents should be reviewed annually with a third-party service provider who has expertise in this area.
  • Duty to diversify plan investments. Employers have a fiduciary responsibility to act in the best interest of their employees by offering a variety of investment options in their plans. Giving employees choices gives them the opportunity to tailor their investments to their lifestyle, budget, and retirement needs. Fiduciaries should also provide employees with adequate and timely information about their investment options so they can make smart decisions and minimize losses.

Failure to comply can be costly.

Fiduciaries that fail to comply with ERISA principles of conduct can be sued by plan participants, and it’s happening with more frequency. But even worse, fiduciaries can be held personally liable for any losses to the plan. That makes this risk a potential game changer for your business, because if one of your employees files suit against you alleging breach of fiduciary duty, it’s going to be costly and time consuming to defend the claim, even if the claim has no merit.

Are you protected from this potentially devastating risk?

As recent lawsuits demonstrate, the role you take as an employer in the oversight of your retirement plans and employee benefits packages should never be taken lightly. Your financial protection should never be taken lightly either, and Fiduciary Liability and Employee Benefits Liability insurance are the smart choices to protect yourself against a devastating lawsuit.

Which coverage is right for your business? Let the business insurance experts at Heffernan Insurance Brokers help you sort it out.