Defined contribution plan sponsors have come under a lot of legal and regulatory fire in recent years, as have the warranties and fiduciary insurance policies that were supposed to protect them.
"If a plan sponsor is really concerned about their personal liability — and I meet few who are not — then they need to know the fine print of those warranties and fiduciary insurance policies they are paying good money for," said Jason Roberts, a Manhattan Beach, California-based ERISA attorney.
The good news is that sponsors and advisors are getting more sophisticated about it, and insurers are responding with more comprehensive policies. The problem, however, is far from resolved.
Roberts said there was a time, not so long ago, when sponsors carried only "fiduciary warranties," contracts that insinuated comprehensive fiduciary coverage for plan sponsors.
"The coverage looked pretty good to sponsors, because what they typically claimed to guarantee was that part of ERISA that requires a sufficiently broad range of funds for participants," explained Roberts.
But the reality is that the protection afforded by these policies was "skimpy," according to Roberts.
In part, that's because it's rare for a sponsor to be sued for not offering a broad enough range of investment options for their participants. More typically, sponsors are sued over fees, they are sued over share class, and they are sued for disclosure practices, among other things.
"Basically, warranties offer coverage for something you are not going to be sued over," said Roberts. "It's not hard to meet ERISA's standards for investment offering. Everyone knows to balance menus with equity funds and fixed-income funds."
"It's the ticky-tack stuff that regulators look at and that leads to further inspection of sponsors' activities — the missing black-out notice, and incomplete Form 5500 — the small stuff that opens the door to further liability," Roberts said.
The best fiduciary insurance spells out exactly what it will cover.
Roberts says policies should address three "buckets": investments, selection of plan service providers, and administrative reporting.
Warranties too often lull sponsors into complacency, but tend to only cover the first area of risk. "I've never seen a warranty that covers buckets two or three," Roberts said.
Roberts says warranties only work well in conjunction with a first-party fiduciary liability insurance policy.
"If fiduciaries can be held personally liable, then they need to know where they're covered," he said. "What if they sign off on a third-party administrator's filing and it's not accurate? That fiduciary is liable."
No matter the scope of the coverage, Roberts warned that "nobody's writing fiduciary policies that allow sponsors to just throw it on autopilot. The world of insurance contracts is much more complicated than that."
Like more and more ERISA specialists, Roberts likes the idea of his clients making use of an advisor with expertise in ERISA section 3(38), which helps shift some of the liability.
On the other hand, sponsors should remember that they can never really remove fiduciary liability from their plate. "Sponsors have to adequately monitor the RIA's work. And document that they are doing so. Just because you use a qualified RIA doesn't mean you get to wash your hands of risk," Roberts said.
