The scene – an unnamed company. A new CFO was appointed and installed as the 401(k) plan administrator. He replaced the 12 investment options offered before with three mutual funds. It turns out his brother managed those funds. A clear conflict of interest with regard to the 401(k) plan – enough to trigger serious legal action.
The employees sued and settled for more than $500,000. Who had to pay?
Not the plan administrator, not his brother… but the company owner.
This could happen to you.
You, as the employer, are liable when something goes wrong with a wide range of benefit plans, as well as health insurance.
It’s called fiduciary liability.
And it’s not just the business assets at risk but also personal assets if necessary – you could lose your home.
I’ll show you in a moment how you can avoid that ever happening. First, let’s get some major misconceptions out of the way.
You’re Not Protected like You Think You Are
You have an ERISA bond, which is required by the federal government to cover losses if, for example, an employee embezzles benefits funds… but it doesn’t cover the scenario above.
Now what about general liability, directors and officers’ liability, or professional liability insurance? None cover fiduciary liability.
Maybe you assumed that since you incorporated, only your business assets are at risk – wrong.
Finally, if you figured that the plan administrator would be liable… unfortunately, not. Think about it this way: you have an accountant who does your taxes. But you sign the return. If the IRS comes calling, they call you.
Not only is your business liable, but you can be held personally liable, too. You can lose all of your personal assets…even your house.
As the employer, you have the role of confirming that the plans you choose and the people running them are trustworthy. You must also monitor them to make sure there is nothing out of place and that your employees are notified as required by law when there are benefit changes, enrollment periods, and more. Your role as the responsible party, the fiduciary, is actually laid out in ERISA, which was enacted in 1974.
This can cover:
- Health insurance
- 401(k) or other retirement plans
- Short- and long-term disability
- Profit sharing plans
- Stock bonus plans
- Simplified employee pension plans
- Target benefit plans
- Among others
If you’re found liable, you not only have to pay your employees for their losses (many cases settle) – you also have to pay legal fees. And that’s at the heart of why this litigation is on the rise.
Every year, about 9,000 lawsuits are filed. The average settlement is just under $1 million, with legal defense costs averaging $365,000.
While years ago most of these fiduciary liability cases were brought against big Fortune 500 companies (you might remember lawsuits against Verizon, Intel, and Chevron in 2014), more recently attorneys are going after smaller businesses.
They can be very susceptible to all these different lawsuits because they perhaps don’t have a full-time human resources or benefits plan professional, which makes it easier for mistakes to be made. And they often don’t hire outside CPAs to conduct independent audits to catch any issues.
The list of potential lawsuit launching areas is long:
- Excessive 401(k) management fees
- Medical malpractice
- Improper disclosures
- Fund mismanagement
- Clerical errors
- Bad investments
- The list goes on…
How to Insulate Yourself from Liability Claims
That’s why you should take advantage of fiduciary liability insurance to avoid losing personal and business assets.
The premium is generally $2,000 to $3,000 per year. If you are sued, the policy pays your legal fees and any judgment or settlement against you. Plus, it’s a deductible business expense.
Fiduciary liability insurance will cover you in many situations. Here are the top five scenarios that you should be concerned about:
1. Excessive 401(k) Management Fees
Lots of Baby Boomers are nearing retirement and starting to look at their 401(k) statements closely. Some funds charge a lot more in management fees than very similar funds. Your employees might calculate they lost $60,000 over the last 15 years because you put them in funds with higher fees, for example.
It can happen easily. Here’s why: with the smaller 401(k) plans at small businesses, fees tend to be much higher because they don’t have the leverage to negotiate them lower. Also, the plan sponsors often don’t know they need to keep an eye on fees. That combination means small businesses are ripe for lawsuits of this type. The proof, at least according to the court, is in comparing the statements to other available funds and the fees they charge.
With fiduciary liability insurance, you’re protected if employees try to get a “refund” on fees.
2. Medical Malpractice
Say you have an HMO for your employees. One of your workers goes to see a doctor who’s part of the plan and something goes wrong – they suffer medical malpractice. I’m sure they will sue the doctor and the hospital.
But that employee can also bring a suit against you. Why? Because you chose the plan and the participating doctors. The thinking goes that if they had the option to choose a different doctor, the incident would not have happened.
Seems crazy that you would be on the hook for something seemingly completely out of your control. But with fiduciary liability insurance, you’re covered.
3. Mismanagement of Plans
Benefits and health plans can be complicated. There’s a lot to keep track of. Inexperienced administrators can get in over their heads, especially if they’re not trained HR professionals.
Requests can be lost. Paperwork misplaced. Then it’s lawsuit time.
That’s how one company ended up settling a claim from an employee for $100,000. The employee was injured at work and tried to claim disability, but the carrier said they had no record of him enrolling. He said he had signed up and that payments were being deducted from his paycheck. He sued and got his past and future benefits and had the attorney fees paid.
Mistakes happen. But fiduciary liability insurance will pay those penalties and the fees.
4. Improper Disclosures and Non-Compliance
Any time there are changes in a benefits plan, how the benefits are structured, new options for where to move funds, or changes in investment strategy, you have to properly notify the plan participants. Same with health insurance, when an enrollment period is coming up, for example.
If you don’t make the announcement properly, you’re out of compliance. And the penalty is $110 per employee per day that you are not in compliance.
With a fiduciary liability policy, your insurer would pay legal defense costs, as well as the cost of the investigation by the departments of Labor or Health and Human Services – plus, any fines or penalties.
This is not something you can neglect. As an employer offering health insurance and benefits plans of all types, you’re at risk. And with this type of litigation on the rise it’s not just big companies with large pockets or corporations with hundreds or thousands of employees that are being targeted. The “growth” area of this little section of the legal industry is small businesses of 10 to 100 employees.
With fiduciary liability insurance you can cheaply and easily protect your business and personal assets. All it takes is a simple application listing the benefit plans in place (401(K), retirement, group health, etc.) and their corresponding asset value. This information can be immediately processed to deliver a policy in less than 48 hours.