The Employee Retirement Income Security Act opened the doors for employers to offer 401k plans to employees. ERISA’s robust standards, aimed at ensuring all plan decisions are made in the best interest of participants, also gave plan sponsors fiduciary responsibilities, which come inherent with liabilities.
In The Best Interest of Participants
Following passage of ERISA fifty years ago,“the 401(k) quickly became a household name,” governed by high fiduciary standards, including “robust reporting and disclosure requirements,” which are spelled out in the legislation. The emergent opportunities to save through 401k plans have provided millions of workers with increased retirement confidence, and most plan sponsors have diligently shouldered their responsibilities. Nonetheless, given the high fiduciary standards associated with plan sponsorship, ERISA litigation has also proliferated over the years, as attorney Diane Dygert of Seyfarth points out:
Breach-of-fiduciary-duty claims involve allegations that plan fiduciaries did not act in the best interests of the participants. This can include failing to prudently select and monitor investment options, not diversifying plan assets, or engaging in conflicts of interest, she said.“Under ERISA, fiduciaries must act solely in the interest of plan participants and beneficiaries, with a duty of prudence and loyalty….If they fail in these duties, they can be held personally liable for any losses to the plan.”
Since ERISA litigation has found its way into courtroom proceedings around the country, Deborah Davidson, an attorney with Morgan Lewis observes that the gates have been opened for even more “lawsuits challenging nearly all aspects of fiduciary decision-making….This has created a frustrating dynamic for plan fiduciaries….ERISA’s prudence standard is process-oriented, but many fiduciaries who implement careful and detailed practices for managing their plans still have to defend these lawsuits because a particular plaintiff would have made a different decision.” Attorneys offer this summary of the most common ERISA litigation theories related to plan terms, interpretation, and errors in administration:
- Excessive fee cases. Plan participants allege that the fees charged by the retirement plans, particularly 401(k) plans, are excessive and not in the best interest of the participants … .The plaintiffs typically argue that plan fiduciaries failed to ensure the fees paid were reasonable, leading to diminished retirement savings for participants.
- Improper denial of benefits. Plan participants may claim that their benefits were improperly denied or reduced.
- Failure to provide required disclosures. ERISA mandates specific disclosures to plan participants, such…summary plan descriptions, and fee disclosures. Claims under the law can arise if these disclosures are not provided or are misleading….
Marcia Wagner, an attorney with the Wagner Law Group further reminds us that ERISA litigation can personally name essentially anyone with responsibilities for the plan: “Defendants in ERISA litigation are not limited to plan administrators, plan sponsors, and other plan fiduciaries, such as investment committees….Investment managers and investment consultants may be listed as defendants. For certain types of claims, such as cybersecurity breaches, the law is presently unclear as to which party bears legal responsibility.” Given the broad scope of possible fiduciary breaches that could impact plan sponsors and others with responsibilities for a 401k plan, employee benefit experts from Bricker Graydon advise that protection is best practice: “Without fiduciary liability insurance you…can be held personally liable for a breach of fiduciary duties. These claims are almost always very costly. Not only are the costs of going to court and defending yourself high, but the chances of losing or having to settle are also incredibly high… Without fiduciary insurance, an accusation can cripple an ill-prepared business.”
Colonial Surety’s affordable Fiduciary+Cyber coverage package ensures retirement plan sponsors and their businesses are protected. For a few dollars a day, you’ll have coverage for defense costs and penalty limits up to $1,000,000, if faced with alleged or actual breaches of duty in connection with the employee retirement plan. Cyber Liability coverage is included at no extra cost, providing additional protection against regulatory actions related to data and privacy, as well as expert response services. Plan Sponsors: You have worked hard to build your business, add a retirement plan and grow your savings. Protect everything you’ve worked to achieve before another day goes by:
Liability Insurance for Plan Sponsors
Need Help With ERISA Bonds and Fiduciary Liability Coverage?
Colonial Surety’s knowledgeable, New Jersey based ERISA service team is available directly, Monday-Friday, 8:30am-5:30pm EST at 888-383-3313 and via email: erisadept@colonialsurety.com.
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