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Fiduciary Liability Basics

(Excerpt from Fiduciary Liability Basics by Mark Larsen, Tillighast-Towers Perrin)

Those having anything to do with pension, savings, profit-sharing, employee benefit, and health/welfare plans are liable to the beneficiaries for any breach of their fiduciary duties. This article examines this liability and possible ways to handle the exposure.

There has always been potential liability for various officers of an organization as well as other persons acting in some capacity relating to an employer's pension, savings, profit-sharing, employee benefit, and health and welfare plans. Specifically, those persons employed by organizations to design and administer such pension and employee benefit plans, including the management of the assets and liabilities of the plans, are liable to the plan beneficiaries
for any breach of these fiduciary duties.

This article briefly examines fiduciary liability and possible ways to handle the exposure.

Liability under ERISA

The passage of the Employee Retirement Income Security Act of 1974 (ERISA) substantially increased the liabilities of fiduciaries in the United States. It also better defined some of the responsibilities and associated liabilities of fiduciaries. As its name suggests, ERISA was created to help protect the interests of pension and employee benefit plan beneficiaries. Under ERISA, an individual (or organization) is deemed a fiduciary if that person (or entity) exercises any discretionary authority or control over the management of any type of employee benefit plan. In particular, any person responsible for the investment, control, or disposition of assets held by the plan would be considered a fiduciary. ERISA broadly defines "employee benefit plans" as: any one plan, fund or program established or maintained for the purpose of providing to its participants or beneficiaries employee benefits.

Fiduciaries can also be held liable for the acts, errors, and omissions of outside entities that provide administrative and related services. Outside entities representing this exposure include those organizations that service pension and benefit plans: consulting and actuarial consulting firms, law firms, accounting firms, professional administration firms, investment advisers and investment management companies, and the trust departments of financial institutions.

Fiduciary Liability Insurance

Fiduciary liability insurance is a popular vehicle for the financial protection of fiduciaries of employee benefit plans against legal liability arising out of their role as fiduciaries, including the cost of defending those claims that seek to establish such liability. Most popular is a stand-alone form or separate fiduciary liability policy.