by Edward A. Schirick, C.P.C.U., C.I.C., C.R.M.
Are you a fiduciary? Do you have fiduciary duties? What is a fiduciary
anyway?
A quick check for the meaning of the word on the Internet revealed
three pages of definitions. The common thread running through all is
that fiduciaries have discretionary authority over another's money,
property, or other assets, and a legal duty to act in a manner that benefits
the other person, or organization.
Using this meaning, many persons are
considered fiduciaries. Insurance agents and brokers, for example, have
fiduciary duties and corresponding liabilities, as do executors of estates,
trustees of organizations, and guardians. In addition to these, administrators
of employee benefit plans (especially retirement plans) qualify as fiduciaries.
Therefore
if your organization has a retirement plan (401(k), 403(b), or another
qualified, retirement plan subject to ERISA, the administrators of that
plan are fiduciaries. In addition, if your organization administers other
employee benefit plans (health insurance to which the employees contribute)
those individuals with administrative duties may be fiduciaries as well.
Retirement Plans
The Employee Retirement Income Security Act of 1974 (ERISA) is the milestone
legislation which governs employee retirement plans and specifically
defines the duties and responsibilities of fiduciaries.
Considering the uncertain future of Social Security, the Secretary of
Labor Elaine Chao, wants to improve workers health and retirement security
by educating employers and service providers about their fiduciary duties
under ERISA. The government has published a small business guide to compliance
titled Meeting Your Fiduciary Responsibilities available on the Internet
at www.dol.gov/ebsa . Published in May 2004, the booklet provides an
explanation of the ERISA law and regulations applicable to private sector
(including for profit and non profit) companies. Public sector (government)
retirement plans and plans sponsored by churches are not covered by ERISA.
The Bottom Line
Most businesses hire a third party service provider to establish their
retirement plan, offer investment options, keep records, produce reports,
and communicate with the government and their employees. Some business
owners are under the mistaken impression this eliminates their fiduciary
responsibility. Nothing could be further from the truth. Any person exercising
discretion, or control over the plan, is a fiduciary and may be held
responsible.
Fiduciary Duties
One of the central duties of a fiduciary is to act prudently. Prudence
typically requires a process and a set of advisors. Documentation of
meetings and decisions becomes critically important under these circumstances.
The plan document serves as the foundation for operations. It should
be followed carefully and kept up to date.
The Risk
Fiduciaries through their actions, or inactions, motivated by malice,
or through ignorance or neglect, may be held personally liable if they
breach their duties. Furthermore, fiduciaries should be aware of the
actions of co-fiduciaries, since fiduciaries have potential liability
for the actions of fellow fiduciaries. This legal concept is known as
joint and several liability.
Risk Management
Administrators of employee benefit plans, as well as qualified retirement
plans should determine if they meet the definition of fiduciary. The
next step involves understanding the role and the duties of a fiduciary
(Risk Identification Step).
Once these are established, a risk reduction plan can be implemented
to minimize the exposure as much as possible through administrative procedures;
then consideration can be given to transferring the rest of the risk
to an insurance company through the purchase of employee benefits liability
and fiduciary liability.
Risk Reduction
One way to reduce the risk of being held personally liable is to establish
a compliance procedure. This puts some parameters around the term "prudence".
Obviously, once compliance procedures are established follow them precisely,
documenting the process and the decisions made along the way.
Another way to reduce fiduciary related risks is to get knowledgeable
advisors who can handle some of the fiduciary functions for you. This
includes third party service providers such as mutual fund or investment
managers, banks, insurance companies, lawyers, and accountants. Under
these circumstances, the fiduciary is not held liable for the individual
investment decisions of the third party manager but is still required
to monitor the manager periodically to make certain the assets are being
handled "prudently."
Read your agreements with these third party service providers carefully.
Pass any contract language regarding insurance, or hold harmless/indemnification
language by your insurance broker and attorney. Consider asking the third
party service provider for additional insured status on their fiduciary
liability.
Another risk reduction measure for a 401(k) plan or profit sharing plan
is to give participants control over the way their assets are invested.
The Labor Department has some requirements which must be met if you choose
this option to reduce risk. Consult your advisors to ensure compliance.
Insurance
ERISA also requires that those who handle retirement plan funds or other
property must be covered by a Dishonesty Bond (Fidelity Bond) to protect
the retirement plan's assets from fraudulent or dishonest acts
of the fiduciaries. The limit of the bond is typically a minimum of 10
percent of the assets of the retirement plan. Beyond this there is no
other requirement for insurance.
General Liability Insurance
Is Not Enough
There is some confusion about the type of liability insurance needed
to address fiduciary risks even among insurance professionals. Is the
general liability policy sufficient, or is more specific insurance needed?
A commercial general liability policy is not sufficient to respond to
the broad range of risks confronting fiduciaries. A general liability
policy with an employee benefits liability endorsement is also insufficient,
and only does part of the job of risk transfer.
The scope of a typical employee benefits liability endorsement is limited
to liability arising out of errors and omissions in the administration
of employee benefits programs. Furthermore, these endorsements usually
exclude liability arising out of ERISA. Employee benefits liability insurance
is usually provided by endorsement to the general liability policy. They
are designed to respond to liability which arises out of mistakes in
the administration of health insurance, flexible spending accounts, and
other employee benefit programs.
Recommended Action
It is imperative that owners and directors with fiduciary responsibilities
examine their general liability insurance to confirm the scope of their
coverage for employee benefits liability, if any. If your policy doesn't
include this coverage, contact your insurance broker to discuss your
risk and if appropriate get a proposal to add employee benefits liability
insurance to your insurance program.
Fiduciary Liability Insurance
If your organization sponsors a retirement plan, the administrators
of that plan are fiduciaries under ERISA and personally exposed to civil
liability for breach of their fiduciary duties. The general liability
policy, even with an employee benefits liability endorsement, doesn't
cover the fiduciary risk under ERISA.
Fiduciary liability insurance is available as a stand alone policy,
or as part of a management liability package, which typically includes
directors and officers liability, employment practices liability, and
fiduciary liability.
Nonprofit camp organizations are more likely than for-profit camps to
carry fiduciary liability insurance protection in a management liability
package. Many for-profit and nonprofit camp organizations are uninsured
for fiduciary liability risks.
Recommended Action
Confirm the risk. If fiduciaries in your camp business are uninsured,
take immediate steps to secure an insurance proposal for fiduciary liability.
Buyer Beware
Sometimes employee benefit liability insurance is provided on a claims
made policy form. Fiduciary liability is almost always provided this
way. It is a good idea to proceed with caution when the insurance coverage
is a claims made format, because there are usually no standardized policy
provisions. Insurance protection may vary greatly from one insurer to
the other, making comparisons and decision making more complicated.
Seek the professional analysis and advice of your insurance broker concerning
the unique aspects of claims made insurance. Be sure to ask about prior
acts coverage, deductibles, defense costs (inside, or outside limits),
as well as the cost and length of the extended reporting period. Always
determine if the insurance will be placed on an admitted or nonadmitted
basis. This is important if the insurance company becomes insolvent at
some point in the future. Under these circumstances, it is more advantageous
to place coverage through an underwriter admitted to do business in your
state.
Prudence
Perform due diligence. Identify your risk as a fiduciary. Expand
your fiduciary IQ. Document, document, document!
Originally published in the 2006 March/April
issue of Camping Magazine. |
