Know your risk Featured

7:00pm EDT January 26, 2009

When a company sets up a 401(k) plan or pension plan for its employees, the focus is on the benefit that it is providing to its employees. Owners and executives are not always aware of the added liability that they incur. The Employee Retirement Income Security Act of 1974 (ERISA) formalized and increased the potential liabilities of fiduciaries, says Gloria Forbes, executive vice president with ECBM. It doesn’t stop there though as ERISA holds those individuals to the highest degree of care, creating a significant risk for many people.

Smart Business spoke with Forbes about such personal liability risks and what you can do to protect yourself and your future.

Who is exposed to this personal liability?

Any employee who is a trustee of the plan is liable to the plan participants along with the employer or owners of the firm. This is often a financial or human resources officer or director. But it doesn’t stop there. Fiduciaries include any individual who exercises any discretionary control in managing plans or has authority or responsibility for administering plans.

Many people are in tune with some of the risks because they are aware of the fidelity requirements of ERISA. They must show evidence of crime coverage for their IRS filings — their 5500 forms. ERISA includes a provision requiring uninsured plans to have an employee dishonesty policy of 10 percent of the plan assets. While important, the ‘ERISA bond,’ as it is often referred to, does not provide all the protection that is needed.

What other steps can employers take to protect their assets from personal liability risks?

ERISA precludes the use of corporate indemnification. However, a fiduciary liability policy can be purchased. These policies are not expensive and provide the protection that a company and its trustees need. A privately held firm can purchase it as part of a ‘package policy’ along with its directors’ and officers’ and employment practices coverages. This policy can also be sold as a stand-alone form. There are many insurance companies that provide the coverage.

Every firm that has any pension, 401(k) or similar savings plan should purchase a fiduciary policy. The limits purchased should be adjusted to the size of the plans covered. Defense costs are often part of the limit of liability purchased. Employees should make sure that employers have taken that into account with their coverage, as well.

What should fiduciaries do to make sure they have the correct protection?

Employees who have fiduciary responsibilities should question whether a fiduciary liability policy is in place. Fiduciary liability policies are not standard contracts like many of the insurance policies that are purchased. Make sure that the policy language is thoroughly reviewed and that available coverage extensions are included. For example, defense costs can be provided within the limit of liability or in addition to the limit. Since these lawsuits are often very costly to defend, much of the protection you need can be eaten away in defense. Every attempt should be made to have defense outside of the limit.

Are there any steps employers can take to help protect their employees’ investments?

The assets of employees in these plans are invested by the individuals according to their appetite for risk and their current age and retirement age. Because many of these investments involve the purchase of equities and bonds, there is risk involved. The best thing employers can do to help their employees is offer a program with a quality investment firm and provide many options.

Additionally, the employer should audit and require a full report of all compensation that the investment company and broker are charging for the management of the plans. These are often undetected layers of charges that can become quite significant, reducing employees’ earnings in their plan.

A diligent search of the marketplace for qualified providers with many options available to employees for investment reduces risk. Ask your investment firm to provide education or advice to employees about their investment options.

Should risk management plans be put in place for personal liability risk?

As with any risk management plan your goal is to eliminate and reduce the risks that you can, transfer risks in contracts where it is possible and insure the risks you cannot financially absorb. The risk reduction and elimination task is a little more complicated with ERISA liability than with other exposures like workers’ compensation.

Expect the Department of Labor and the IRS to increase their oversight of ERISA compliance. Regulations change frequently and can create new reporting requirements or liabilities of which a company may not be aware. Uncertainty is probably the greatest area of risk for any firm. An annual review with your insurance broker or legal counsel can keep you abreast of current issues.

There is increased focus on making sure that there is no evidence of conflict of interest. Placing your employees’ assets in these plans with a company bank, investment firm or other relationship for leverage can result in civil penalties, fines and liabilities.

GLORIA FORBES is executive vice president at ECBM. Reach her at or (888) 313-3226.