Providing at least one named fiduciary is a required component of every employee benefit plan. Pursuant to federal law, any fiduciary of an employee benefit plan is personally liable to the plan for any losses resulting from a breach of fiduciary duties (ERISA § 409).
A fiduciary is a person who exercises any discretionary authority or control regarding the management of an employee benefit plan or exercises control in the disposition of its assets. Fiduciaries include those that provide investment advice for a fee and have discretionary authority or responsibility in the administration of the employee benefit plan (ERISA § 3(21)).
In carrying out duties with respect to an employee benefit plan, a fiduciary is held to a specific standard of care. These fiduciary duties include (ERISA § 404(a)(1):
- Discharging all duties for the exclusive benefit of plan participants and their beneficiaries, including defraying reasonable expenses of administering the plan;
- Acting with the care, skill, prudence, and diligence of a prudent person in a like capacity;
- Diversifying the investments of the plan while minimizing the risk of substantial losses, unless it is not prudent to do so; and
- Performing in accordance with the plan documents, unless the same are inconsistent with ERISA
Any plan loss that is caused by a breach of these fiduciary duties makes the fiduciary personally liable for such losses.
A separate ERISA provision requires that every plan fiduciary, and any other person handling plan funds or property, be bonded (ERISA § 412). The purpose of Section 412 bonds is to protect plan funds against losses resulting from fraud or dishonesty. Although required by law, a bond does not provide protection to a fiduciary for losses associated with a breach of fiduciary duties. A bond specifically provides protection for losses associated with fraud or dishonesty or, more simply put – losses resulting from theft. Moreover, a bond is typically limited to $500,000; thus, plan losses exceeding that value, whether resulting from theft or from a breach of fiduciary duties, leave plan participants seeking other avenues by which to recover their losses. In many cases, plan participants will eventually seek recourse from the fiduciary. Thus, plan fiduciaries remain exposed to personal liability. This is especially true where there is a combination of a theft of plan assets that was facilitated by a breach of fiduciary duty.
Though not required by law, fiduciary liability insurance coverage provides protection that is absolutely necessary. With almost 90 million participants in defined contribution retirement plans, the vast majority of which are 401(k) plans, and approximately five trillion dollars in plan assets, plan fiduciaries are exposed to a substantial amount of risk. Insurance protection is available to provide coverage for these risks, and any plan fiduciary must consider obtaining that protection. Such an approach not only protects the fiduciaries from personal liability exposure, but also provides additional resources to remedy fiduciary breaches.