Employee benefits are non-mandatory perks in the form of welfare and retirement plans offered by many employers. Although the law doesn't mandate it, the law through the Employee Retirement Income Security Act of 1974 (ERISA) ensures employers follow through with their commitment to any provided benefit plan. In the event of errors or omissions, employees can sue for mismanagement. Hence, businesses are encouraged to have fiduciary liability to get protection against lawsuits.
Fiduciary liability is a risk management plan to protect businesses from claims due to breach of contract for things like employee benefits plans and retirement plans. This management liability policy caters to the legal costs associated with error and agreement breach. A business, as well as the employees charged with fiduciary duties, are covered by this policy. The reality about fiduciary duties is that, if any individual in charge of employees' benefits makes certain mistakes, the company/business bears the brunt.
In today's society, job seekers look beyond salaries or wages. Employee benefit plans are perks that draw talents to accept offers or even attempt to apply for a job as the case may be. This prompts many businesses to incorporate the program to attract job seekers although it's nota legal requirement. The downside is that should mismanagement occur, employees can sue their employers. If the claim is established, a business can end up paying a huge price. However, with an insurance policy, such as fiduciary liability, businesses can deal with such cases of claims without going bankrupt.
What Entails an Employee Benefit Plan?
The employee benefit plan consists of immediate and future plans. The immediate plans deals with welfare, such as access to dental care, medical benefits, and disability benefits. The future plan is the retirement plan. A retirement plan may include the popular 401(K), stock purchase, and benefit pension plans. The supervision of these plans is in the care of individuals known as fiduciaries.
Who is a Fiduciary?
A fiduciary is anyone whose name is included in the benefit plan document either as a beneficiary or part of the management. Fiduciaries will include employers, the director & officers of the employee benefit plan, as well as trustees. Fiduciaries are usually part of a company's workforce. In some cases whereby a company delegates the major part of fiduciary duties to a third-party firm, there must be a set of individuals who will oversee the activities of the contracted firm.
What Does the ERISA Contain?
The 1974 Employee Retirement Income Security Act (ERISA) regulates the activities of the Fiduciaries. It ensures employees get the benefits promised by employers such as welfare benefits and retirement benefits. As indicated earlier, ERISA doesn't require businesses to provide these plans, however, once they do, the promises must be fulfilled accurately.
The ACT requires a safety net procedure to protect employees' plans. The procedure demands a fidelity bond worth 10% of the entire employee benefit plan asset. This bond is known as the ERISA bond.
While the ERISA bond protects the employees entitled to an employee benefit plan, the fiduciary liability protects individuals who oversee the plan (administrators), and the company as well.
Aside from theft, fiduciary liability insurance provides coverage for mismanagement related to fiduciary duties, and protects the legal liability for improper plan care. Below is a list of claims that the insurance typically covers:
- Giving irrational advice regarding investing employees retirement plan
- Irrational investment of retirement funds
- Wrongful modifications in employee benefit plans
- Poor selection and supervision of an external body managing fiduciary duties
- Deviating from the agreed plan document
- Omissions and errors by the administrators
These issues can result in cost/expenses which the fiduciary liability covers. These include:
- Coverage for new plans
- Voluntary settlement fees
Costs incurred in the process of defending the business are covered by the insurance. Additionally, settlement and damages costs are likewise covered.
The coverage is targeted at the mismanagement of benefit assets and errors while performing the fiduciary duty. Anything outside these which are regarded as criminal or fraudulent are not covered. A case of fidelity bond or corporate fund embezzlement is not covered by the insurance. It's an outright criminal offense.
Also, the fiduciary liability will not provide coverage for a third-party company even if it oversees the employee benefit plan for the client company. Each of the third-party contractors or administrators hired is required to have insurance. Only the officers who oversee the activities of a third-party administrator on behalf of a company can benefit from the coverage.
Refusal to provide funds as stipulated by the ERISA requirement is regarded as an intentional violation of federal law. The fiduciary liability will not cover such an intentional act. However, certain policies may cover the defense process if such allegations are levied against a company.
Fiduciary liability insurance is beneficial for any business offering welfare, benefits, and retirement packages to their employees. For a small business with few employees and no provision for an employees benefit plan, this insurance is not needed. For bigger businesses offering their employees benefits, fiduciary liability insurance is of utmost importance. The fiduciaries can try to do a good and accurate job, however, perfection will always elude them. Miscalculation, mishandling, and improper management errors may occur despite being cautious and careful, hence it's best to be on the safe side.
Companies offering complex retirement plans and welfare packages should keep in mind the cost of claims and legal fees. Court ruling may bring about a settlement. Not just that, the cost of defending a case is also quite high. When both are combined, a business may lose most of its financial power. It's almost a rule of thumb nowadays to get a fiduciary liability to prevent claims that may cost a business dearly. Even when the best team is handling employee benefits it's best to have insurance just in case any problem arises. The complexity of certain employee benefit plans allows employees to sue if the plans do not follow procedures as laid out.
Even if a business chooses to employ a third-party company to handle employee benefit plans, the department of a company charged with supervising the activities of the third-party company is still vulnerable. A company is not simply exempted from an employee benefit plan issue because an external body is in charge. The fact that a company offers such plans automatically makes it a responsibility that must be supervised. To stay prepared and guard against risks that may drain a business financially, fiduciary liability insurance is an excellent option.
The cost of fiduciary liability is not exorbitant, yet, it depends on many factors. Factors such as the size of the company (number of employees), the assets, and sometimes, history of claims. It may cost around $500 to $3000 annually depending on the needs of a business. Since the amount is not fixed, sometimes, the cost of a fiduciary liability can be slightly higher. Once the liability insurance is purchased, it can give coverage of up to $20 million annually.
Oftentimes, a business has to purchase many types of policies such as directors and employment practices insurance. All can be obtained together at a less costly price. More importantly, the low cost of fiduciary liability compared to the high amount of a legal claim makes it reasonable to purchase the insurance.
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