Seizing the Advantage with Plan Restatements

The numbers have been released and they are big! The U.S. Department of Labor disclosed that 67 percent of the private employee benefits plans that its Employee Benefits Security Administration (EBSA) investigated in fiscal year 2020 resulted in significant monetary awards, mandatory new plan procedures, removal of plan fiduciaries, and even indictments.

The monetary recoveries alone – which included plan repayments, fines and penalties – totaled more than $3.1 billion!

Employers appreciate that offering a 401(k) plan creates advantages for employees, their company and owners. They also know sponsoring a plan involves complexities and risk, including potential personal liability for those who act as fiduciaries. Individuals who are responsible for plan decisions and management or serve as owners or officers of a company are considered fiduciaries. They have had fines or penalties assessed against their personal finances and have been held personally responsible for the decisions they make as they manage their plans.

My blogs focus on prudent decision-making and best practices for plan sponsors. Employers who put the interests of plan participants first, develop and follow prudent plan policies, and document their compliant actions may believe they are unlikely to be a target for investigations such as those conducted by EBSA or lawsuits.

Unfortunately, in today’s world, investigations are launched and lawsuits filed despite operational diligence. The impetus for such challenges can be an unhappy current or former employee, a beneficiary of a plan participant, or an honest mistake in a required regulatory filing. Prudent fiduciaries may be in a good position to defend themselves, but such a defense can be time-consuming and costly.

This is where fiduciary liability insurance comes in.

Fiduciary liability insurance differs from the ERISA or fidelity bond that all 401(k) plans must purchase. The ERISA bond is mandatory and protects plan assets on behalf of participants. Fiduciary liability insurance is optional and can help plan sponsors with the cost of defending themselves.

Employers will want to consult with their commercial insurance carriers as fiduciary liability coverage varies by provider. Some policies pay only for defense in the case of lawsuits, and others reimburse costs associated with a regulatory investigation.

Employers also will want to be mindful of the potential risk of cyber fraud. Today there are increased instances of criminals fraudulently – and successfully – taking large distributions from 401(k) plans. Recent lawsuits have been filed against recordkeepers whose security procedures failed to prevent such breaches as well as the plan sponsors who have hired them.

Once again, a consultation with a commercial insurance agent is in order. It may be that the fiduciary liability coverage offered by your agent will cover defense against charges that you did not adequately protect plan data or ensure that plan service providers would do so. Or it may be that your agent will suggest mitigating 401(k) risk by including it with other insurance coverages you purchase – such as errors and omissions or directors and officers – in a management liability package.

A 401(k) plan provides great advantages to employees, companies and owners. Strategically designed and prudently managed, it can attract workplace talent and help individuals build toward a secure financial future. Adding fiduciary liability insurance – as well as cybersecurity coverage – can allow employers to operate more confidently, knowing that they will have assistance defending their prudent actions if ever needed.

This blog is written to help make the lives of plan sponsors easier in the process of meeting legal requirements under ERISA for their defined contribution plans. Please understand that reading this blog should not alone take the place of a one-on-one consultation regarding the needs of your specific plan, and hence cannot be a guarantee against fiduciary breaches.