By Dick Clarke, CPCU, CIC, RPLU

Serving as a trustee to pension or another employee benefit plan is a good opportunity, isn’t it? After all, you are able to watch over the investments of your practice partners or employees.

Did you know, thought, that the privilege of monitoring those investments, however, comes with a big financial risk: Under federal regulations governing these plans, if you serve as a trustee, you may be exposed to [ITAL]personal liability[/ITAL] for legal defense costs and court-ordered damage awards if plan participants challenge decisions you make for the plan.

The regulations of the Employee Retirement Income Security Act (ERISA) are explicit about the personal liability of plan trustees or fiduciaries. If an individual has “discretionary judgment authority” for an employee benefit plan, this person is personally liable for the defense in the case of a lawsuit brought by plan participants or the Department of Labor. Furthermore, Section 410(a) of ERISA makes it clear that this personal liability cannot be satisfied by indemnification language in corporate bylaws.

Many types of action may be considered “discretionary judgment authority” in court, including things over which the trustees may feel they had little control, such as enrollment procedures or government filings. Plan participants may sue individually or as a class if they feel that benefits were misrepresented or if they believe that different decisions by the trustees could have yielded a higher return.

The personal liability issue is important, especially in the light of lawsuits that have taken plan in recent history. Headlines about mismanagement of pension plans have jumped from the business section to the front page. Suspicious partners or employees now dispute the actions of the plan trustees in court. Whether the suits are justified or frivolous, the cost of defense and damages can be high.

The potential cost of lawsuits is staggering. According to fiduciary liability surveys performed by the global actuarial consultants Tillinghast–Towers Perrin in 1999 and 2003, the average per claim defense cost rose from $124,000 in 1999 to $365,000 in 2003. The average judgment hovered around $1 million and in most cases, these costs were shouldered by the individual trustees.

ERISA mandates that nearly all employee benefit plans must carry an ERISA Fidelity Bond. The bond protects plan participants by covering the plan assets against losses due to misuse or misappropriation by plan fiduciaries, such as trustees. To put it simply, the purpose of an ERISA Fidelity bond is protect a plan [ITAL]from [/ITAL]its trustees — in the sense that the bond insures the plan assets, up to the value of the bond, against acts of dishonesty by the plan fiduciaries.

It does not protect the trustees themselves.

A SOLUTION IS AVAILABLE
As dire as this may seem, trustees can protect themselves from disastrous legal costs without abandoning their responsibilities as plan trustees. The solution is fiduciary liability insurance.

A fiduciary liability policy can be written to shield pension-plan trustees from personal liability for defense expenses and damages due to lawsuits brought by plan participants or the Department of Labor. With this coverage, the insurance company provides a skilled ERISA attorney who negotiates an out-of-court settlement or arranges for the payment of any damages that the court may impose, up to the limit of the policy.

With this kind of coverage available, you might assume that fiduciary liability insurance policies are universal among pension plan trustees. They are not. There are two main reasons for this lack of coverage:

• This insurance is not legally required under ERISA regulations. Many plan sponsors choose to overlook or underestimate the risk to their trustees.

• Coverage is not easy to find. Some underwriters use extremely complex formulas to determine risk and to craft coverage, especially in the case of large complex organizations or those that include employer stock in their 401(k) plans. Obtaining coverage for executive deferred compensation plans, or highly unusual benefit plans may be nearly impossible.

However, trustees of most small plans with typical plan assets should be able to find good coverage at a reasonable price. Smaller, simpler plans have the benefit of lower risk, as policy limits are typically based on the amount of total plan assets and the number of participants.

This should translate into cost-effective premiums, especially when compared to the cost of a competent ERISA attorney. If you sponsor an employee benefit or pension plan, check with the insurer that provides you with ERISA fidelity bonds or other insurance to determine if the company also offers fiduciary liability insurance.

Many chiropractors would question their participation as trustees if they fully understood their level of personal exposure for legal fees and damages. In the interest of maintaining the steady guidance of qualified trustees, purchasing fiduciary liability coverage for plan trustees is a fair and prudent course of action for plan sponsors.

Richard G. (“Dick”) Clarke is the author of two books: Maximizing Coverage/Minimizing Costs and The Three Faces of Executive Liability. He also teaches programs sponsored by the National Alliance for Insurance Education and the Society of Chartered Property Casualty Underwriters. He can be reached at dclarke@jsmithlanier.com.