Do you need fiduciary liability insurance? You do if you administer any employee benefit plans.

When a small tool-and-die company that offered its employees long-term disability (LTD) and life insurance plans failed to notify the life insurance company that premium payments would be suspended for an employee out on LTD, the life insurance was terminated. When the employee died and the life insurance company denied coverage due to failure to pay life insurance premiums, the estate sued the fiduciaries of the plan. The judgment against the fiduciaries was $52,000.

This is an true example of how your responsibility as an employer makes you a fiduciary for an employee benefit plan, potentially putting your personal assets at risk. So, how do you know if you are a fiduciary? By definition, a fiduciary is a person to whom property is entrusted for the benefit of others.

ERISA applies to any plan, fund or program established or maintained by an employer or employee organization to provide pension or welfare benefits to its participants and beneficiaries. This includes medical, dental, life, disability and accidental death benefit programs along with Flexible Spending Accounts (FSAs), Health Savings Accounts (HSAs), Defined Benefit Pension Plans and Defined Contribution Plans 

Since fiduciaries must buy three different types of coverages in order to be protected, gaps can occur, causing confusion and possibly liability. To ensure proper protection, fiduciaries need to purchase:

* Employee Benefits Liability Insurance -- Added by endorsement to Commercial General Liability (CGL) policies, this responds to administrative errors in handling employee benefit plans. Example: Failure to enroll.

* ERISA Fidelity Bond -- ERISA requires all individuals who handle plan assets/funds to be bonded to the lesser amount of 10 percent of the plan assets or $500,000. Example: Protects plan from theft of assets.

* Fiduciary Liability Insurance -- Provides protections for claims that allege the fiduciary breached his or her duties as defined by ERISA. Examples: Administrative error, improper advice, improper calculation of benefits, wrongful termination from plan, improper disclosure to participants, improper interpretation of plan documents, insufficient funding of plan, imprudent investment decisions including imprudent choice of third-party administrator, insurance company or mutual funds.

Selecting an outside investment manager does not eliminate fiduciary liability, it only reduces it. For example, a manufacturing company named itself as the 401(k) plan fiduciary with the company president serving as the plan trustee. Prudently, an outside firm was hired to manage investment for plan assets. When a new controller was hired and noted concern over the lack of data coming from the investment firm, he notified the president who failed to take immediate action. When the president did attempt to withdraw funds, he found the investment firm had gone bankrupt. The court held that the president and the company had breached their fiduciary duties and rendered a judgment against the company and its president (personally) for $635,000.

A fiduciary's responsibility includes tracking and implementing ERISA changes. The trustee of a plan that failed to amend the plan in a timely

fashion to comply with tax law changes ended up with the IRS disqualifying the plan. As a result, the trustees entered the IRS Closing Agreement Program and paid $142,000 to have the plan's qualified status restored. When new trustees were appointed, they successfully sued the old trustees for breach of fiduciary duty and won a judgment of $294,000.

Two common misconceptions about fiduciary liability insurance are that your fidelity bond will cover your fiduciary exposure and that coverage is expensive. Neither is true. A fidelity bond does not protect the fiduciary's personal assets. In fact, the ERISA limit does not relieve the fiduciary of full plan asset responsibility. It is simply a regulatory requirement. Also, premiums are actually very reasonable and are far less expensive than retaining an ERISA attorney. Don't let these misconceptions keep you from properly securing your personal and professional assets.

RELATED ARTICLE

Under the federal Employee Retirement Income Security Act (ERISA), you become a fiduciary if you:

* Are named in the Plan Document or are identified as a fiduciary by the sponsor of the plan.

* Exercise any discretionary authority or discretionary control with respect to the management, administration or disposition of plan assets.

* Provide investment advice for a fee or other compensation.

Philip M. Lyon is vice president, Commercial Insurance and John Mrsan is with the Commercial Insurance group at ALCOS in Sterling Heights, a member of the Detroit Regional Chamber.