Fiduciary liability insurance premiums are rising while coverage is getting increasingly more difficult to purchase. Retirement plan committees and sponsors who got renewals for their 2021 fiduciary liability insurance may have been shocked. The premiums seem to be higher. And, it includes caps on liability coverage, and/or more restrictions and exclusions.
Theis to protect an organization and its named fiduciaries. Protecting those who are responsible for overseeing the management of employees’ money in 401(k) plans, is paramount. Protection needs to be in place against lawsuits by plan participants alleging a breach of fiduciary duty under the Employee Retirement Income Security Act (ERISA). ERISA is the law that governs retirement plans. As lawsuits alleging fiduciary breaches continue to increase, fiduciary liability insurance premiums and coverage is also rising in price. Therefore, the coverage is becoming more restrictive.
Moreover, with more employees at home during the pandemic there seems to be more panic setting in. Folks are panicking due to market volatility in 2020. Fiduciary lawsuits filed against employee retirement plans also proliferated. And typically, the settlements are quite large, putting pressure on fiduciary liability insurance providers. Additionally, the litigation shows no signs of stopping, according to Carol Buckmann, a partner with the law firm Cohen and Buckmann in New York.
There’s a potential silver lining: Employers do have the ability to push back on fiduciary liability insurance companies. According to a, a best practice is to make a strong case that your plan is well-run and follows fiduciary best practices. Be transparent about your plan and its practices, and if your plan has had fiduciary issues in the past, be prepared to show how you fixed them. Or, if you’re still in the process of fixing those problems, show your fiduciary liability insurance provider that you’re being proactive to address them. Some examples could include conducting quarterly reviews of investment performance vs. relevant benchmarks, regularly sending out RFPs to make sure plan fees and services are aligned with plans of similar size in your industry, and disclosing plan fees.
Even with all that said, some employers may have to accept fiduciary liability insurance policies with lower coverage caps. They also have more exclusions and higher deductibles. Given the significant premium hikes, employers may need to settle for basic coverage to keep the policy affordable.
Nonetheless, fiduciary liability insurance premiums paid on its own is not enough to protect an organization and plan fiduciaries from litigation and related costs. Evaluate your retirement plan for areas of weakness and shore up any problem areas. Consider taking actions such as building and reinforcing compliance frameworks. Look at auditing your plan regularly, and possibly consider a pooled employer plan (PEP). Also, consider paying plan fees rather than requiring them to be paid out of plan assets.
In addition, don’t entertain the idea of forgoing fiduciary liability insurance coverage entirely. Fiduciary liability insurance premiums are high but they do afford some protection. While it may be expensive, it’s never been more necessary for plan fiduciaries to ensure they are covered.
Steff C. Chalk is Executive Director of The Retirement Advisor University, a collaboration with UCLA Anderson School of Management Executive Education. Steff also serves as Executive Director of The Plan Sponsor University and is current faculty of The Retirement Adviser University.