If you are a fiduciary for your employer’s retirement savings plan, you already know that life isn’t getting any simpler. Lawsuits against plan fiduciaries are on the upswing, and some fiduciaries have been found personally liable for plan losses under ERISA, the Employee Retirement Income Security Act of 1974.
What you may not know is that neither your company’s directors’ and officers’ (D&O) insurance nor the bond that all retirement plan sponsors are required by law to carry will indemnify you for claims involving benefit plans. The former excludes such claims; the latter covers only plans themselves. Instead, you need fiduciary-liability insurance, and if you don’t know whether you have it, you should find out.
This wasn’t such an urgent issue a decade ago. But the litigation landscape began to change in 2004 when 10 former outside directors of Enron Corp. were together forced to cough up $1.5 million of their own money, without recourse to insurance or indemnification, to settle a lawsuit filed by the U.S. Department of Labor. The suit alleged mismanagement of employee retirement funds, which were heavily invested in Enron stock that became worthless after the company imploded in an accounting scandal. Prior to that time, the idea that corporate officers or directors might have to open their own wallets to settle such a case was virtually unthinkable.
Since then, the floodgates have opened, with plaintiffs’ lawyers filing dozens of lawsuits against retirement plan sponsors and their executives who, they claim, committed a variety of fiduciary mistakes, from countenancing exorbitant vendor fees to stocking their plans with inappropriate investment options. Some of the cases have been dismissed, but many continue to grind their way through the court system. All the while, defense costs are accruing.
To be sure, some of the cases have been resolved in favor of the defendants. Deere & Co. prevailed, for example, in a closely watched class-action claim alleging it failed to disclose revenue-sharing arrangements to plan participants and so caused the plan to overpay for services from its provider, Fidelity Investments.
But not every plan sponsor has fared so well. In July the Ninth Circuit Court of Appeals upheld a lower court decision in Johnson v. Couturier that went against a company with an employee stock-ownership plan. The courts said the company could not indemnify its executives for legal defense costs in the case, which centered on claims by ESOP participants that their CEO’s compensation was so excessive that it was unfair to them as stockholders. Attorneys who monitored the case say the courts appear to have concluded that the pay package represented either willful misconduct or lack of prudence on the part of company executives, who were fiduciaries of the ESOP.
It would be rare to find a large publicly traded company that doesn’t carry fiduciary-liability insurance, which can be purchased as a stand-alone product or as a rider to a general liability policy. But Christine Dart, global fiduciary-liability product manager at Chubb, a large insurer, says the coverage isn’t so ubiquitous at smaller companies, especially those that aren’t publicly traded.
To be fair, the smaller your company and its retirement plan, the smaller your exposure and the less likely it is that you will attract the attention of plaintiffs’ attorneys, who tend to focus on deep-pocketed defendants, notes Joseph Faucher, an attorney at a Los Angeles–based law firm. Still, there are a lot of corporate executives at risk, and most CFOs would be hard-pressed to work up enthusiasm for being among them. “Even if you are sued and upheld by the courts,” notes Dart, “the cost of defending these cases can be significant.” In the Johnson lawsuit, company officers and directors had $5 million of insurance coverage protecting them, but burned through that well before the litigation was resolved.
Chubb, Travelers, and AIG’s Chartis subsidiary are major players in the fiduciary-liability insurance market, although there are many other companies that offer the policies as well. The cost, usually borne by the plan sponsors, is highly dependent upon the size of your retirement plan, your claim history, and your plan’s investment lineup. A plan offering company stock, for example, will likely be deemed a higher risk than one that does not, notes Cathy Cummins, managing director and fiduciary-liability national practice leader at Marsh, the insurance-brokerage and risk-advisory unit of Marsh & McLennan Cos. However, she says, fiduciary-liability policies cost “significantly less” than D&O policies. Pricing is stable right now, she adds, and within historical norms.
As a bonus, fiduciary-liability policies typically cover liabilities related to all kinds of employee benefits programs, not just retirement plans. They can, for example, cover health and welfare plans and nonqualified executive-compensation plans. Just be sure, Cummins notes, to disclose to the underwriter which plans you offer and expect to be covered.
While fiduciary-liability insurance is usually paid for by employers that sponsor pension plans, Faucher notes, plans themselves can buy the insurance for their fiduciaries if the insurer retains recourse against fiduciaries who breach their duty to the plan. He suggests that if you are a plan fiduciary, make this type of insurance part of your compensation package. Carrying it is a relatively simple way to protect yourself from an increasingly complex liability.