MANAGING YOUR RISK – MAY 2007
Loss Exposures of Your 401(k) and Other Retirement Plans
By Anthony Bevilacqua
Employee benefit plans are a valuable tool for any type of business to attract and retain qualified personnel. 401(k) retirement savings plan are very popular with all forms of businesses small and large, from two person organizations to multi-national publicly traded companies employing tens of thousands of workers. The Employee Retirement Income Security Act (ERISA) of 1974 was passed to assure that employees participating in pension and welfare plans would indeed receive the benefits promised by such programs.
With the employee goodwill benefit these plans provide, there are loss exposures the Act set forth for ‘fiduciaries’ of these plans. What is a fiduciary? According to ERISA, a fiduciary is an individual or corporation that exercises discretionary authority or control in managing the plan, disposing of its assets, renders investment advice for a fee, or has any discretionary authority or responsibility in administering the plan. Needless to say, this is a very broad scope of responsibility! Further, the ERISA law was purposefully drafted to make the individual trustee named as fiduciary of the plan personally liable for breach of fiduciary duties in connection with the management of ERISA plans.
There are two very important insurance coverages that help individuals reduce or control their fiduciary loss exposures:
- ERISA Bonds – these bonds are required by ERISA law. The bond protects the cash within the ERISA bank account from misappropriation, embezzlement and fraud. ERISA law states the amount of the bond must be at least 10% of the asset value of the plan. For example, your Plan has an asset value of $300,000 as of year end. The law requires a bond amount of at least $30,000. If you, as fiduciary, decide to acquire a bond for only the minimum amount, you are personally liable for $270,000. That’s not a good position in which to place yourself. The suggestion is to buy a bond equal to the full asset value of the Plan, or consult with your insurance professional about how much coverage to buy. Premium cost for these bonds are very inexpensive, typically $150 to $500 for a three-year bond term.
- Fiduciary Liability Insurance – this coverage is always overlooked by Plan trustees. Why? Almost all 401(k) plans are administered by third parties such as insurance companies or investment houses. Thus, the Plan trustee believes they have transferred the fiduciary liability risk to that party. Not true! The trustee(s) are still held personally liable for situations involving benefit claim denials; a reduction in benefits; inadequate plan funding; plan terminations; or questionable choice of an outside service provider, insurance company or investment management firm. Claims can be filed by a plan participant, beneficiary, governmental agency (such as the Department of Labor) or by another fiduciary. Premium cost for a $1,000,000 liability policy typically runs $1500 to $2500 annually.
Designing an attractive employee benefit program adds value to your organization. Properly protecting yourself from the financial risks of loss arising from those plans does too.
Anthony Bevilacqua, CPCU is President of Anthony & Company, an independent insurance agency with special insurance and risk management services tailored to the needs of the commercial and residential development community. You can reach Mr. Bevilacqua at (908) 806-8844 or email him at insure@anthonycompany.com.