Fiduciary Liability vs. ERISA
If you have and Employee Stock Option Plan (ESOP) or a 401K plan for your employees you probably also have an ERISA bond. This type of fidelity bond is required and you are to carry 10% of the plan assets. The ERISA bond protects the plan against fraud or dishonesty. ERISA stands for the Employment Retirement Income Security Act. The Employee Retirement Income Security Act of 1974 is a federal United States tax and labor law that establishes minimum standards for pension plans in private industry. It contains rules on the federal income tax effects of transactions associated with employee benefit plans.
You should also be carrying Fiduciary Liability. Fiduciary Liability provides coverage for mismanagement of the plan. The following are some claim situations.
- Claims involving company stock—A business allows, and in fact encourages, employees to invest 401(k) monies in company stock. When the company declares bankruptcy and its stock is rendered worthless, employee 401(k) plan balances are decimated. In response, the employees bring lawsuits (Enron and RadioShack are two notable companies in which this claim scenario actually took place).
- Claims from fees associated with 401(k) plans—Employees bring a class action claim asserting that the fees charged by the manager hired to administer the company’s 401(k) plan were 1 percent higher than the average rate for such services. However innocuous this small disparity appears, over a long period of time (e.g., 20–30 years), it can vastly reduce (often by as much as, or even more than, $100,000) an employee’s 401(k) balance.
- Claims involving healthcare plan administration—A company offers its employees healthcare insurance coverage. The company is sued when it fires an employee who needs a $500,000 liver transplant, which he or she will now no longer be able to obtain using his or her own means. Employer-provided healthcare plans are also exposed to claims alleging that the plan (a) included incompetent medical providers in their network and/or (b) wrongfully withheld treatment for certain illnesses or conditions.
- Claims from the selection of risky investments in a defined benefit pension plan—A company’s employees are covered by a “traditional” defined benefit pension plan. The employees sue their employer for selecting a manager who invests a large proportion of the pension’s funds in highly risky securities (e.g., “junk” bonds, initial public offerings, “penny” stocks). The suit is brought when these risky investments fail, rendering the plan insolvent and thus unable to pay promised benefits.
If you would like a quote for Fiduciary Liability or need an ERISA bond please contact your Professional Underwriters, Inc. agent or contact us here.