It’s an ongoing process of training these individuals because,
typically, for members of investment committees, benefit
committees, their sole job is not just running their 401(k) plans. If
an adviser can add value by educating them further about how to
be better fiduciaries, better stewards of the plan, it can minimize
the potential for litigation.
But, as we all know, we can be sued for anything, and that’s
where the topic of FLI [fiduciary liability insurance] works so well.
You really need to have the processes in place, and basically FLI
will protect those fiduciaries on the committees, named fiduciaries, etc., from any potential claims even if a fiduciary is found to
be at fault.
When you look at it overall, for the cost and the types of coverage it provides, it’s not that expensive of an insurance. However,
it’s established to cover breach of fiduciary duties. It’s paying the
fees if you are charged through a DOL [Department of Labor]
investigation or an IRS audit. Whereas the fidelity bond is simply
just covering theft and fraud, fiduciary liability insurance is much
broader and specific to ERISA.
PS: So is this good for all plan sponsors, or are there some for
which this is more useful?
Blaze: It’s for 401(k) programs and 403(b) defined benefit [DB]
programs. Particularly with 403(b) plans, look at the lawsuits
filed recently against many institutions of higher learning. Major
universities—which are always touted as having phenomenal
investment success in the way they manage their endowment
foundations portfolios—look what’s happened to them, just
as of last year. You were seeing fiduciaries of major Ivy League
schools and other public and private institutions being sued for
Therefore, I believe it’s definitely worth exploring, weighing
out the cost basis, and, regardless of what happens with this DOL
fiduciary rule, litigation will continue. We know there’s sensitivity
to fees, there’s sensitivity to overall governance best practices,
and what better way to protect you? Why would we drive a car
without automobile insurance? Why would we own a home without protecting ourselves against theft, fire or whatever natural
disaster that could cause us to lose our home? The same should
be true of fiduciaries’ personal liability.
PS: What is fiduciary liability insurance, and what do plan
sponsors need to be aware of?
Blaze: Fiduciary liability insurance has been around for a while.
Again, it’s all about a process. The process needs to be under-taken by the plan sponsor, by the adviser working with the plan
sponsor to explore the need to have fiduciary liability insurance
coverage. If it’s being excluded from your officers’ and directors’
coverage and other forms, investigate and calculate what the
costs would be to provide this type of coverage. It can be paid for
by the plan or by the company, but there are many unintended
consequences, and there is more involved than just buying a
policy. First and foremost, how do you want to pay for this? It
can be a plan expense, i.e., you can use the plan to pay for it. But
there are some potential consequences if you do that, because
purchasing fiduciary liability insurance is a fiduciary act in itself.
For example, when the plan pays for the coverage, the individuals
covered by the policy should obtain a “non-recourse rider,” the
cost of which is usually modest.
With the Retirement Institute, the topic of fiduciary liability
PS: What do you think plan sponsors should most remember
insurance is currently one of the three we offer. We have created
not only a one-hour CE [continuing education] presentation that
can be used to educate advisers or plan sponsors but be deliv-
ered by a representative of the retirement group within New York
Life Mainstay. Or, if the adviser is comfortable, he could deliver
that message and presentation.
Blaze: It’s not as simple as just going out and purchasing a policy,
because policies vary, based on the individual’s needs. What’s
covered by the policy? What’s excluded? But one that always
seems to get the attention of these individuals who are being
asked to sit on investment committees and take the status of a
fiduciary under ERISA.
As I said earlier, fiduciary liability insurance, just like the fidelity
bond, can be a plan expense. So, you could use plan expenses
to pay for that cost. However, as noted in such cases you will
need to obtain a non-recourse rider. If you were on an investment
committee and facing litigation, and your insurance company
that was providing the coverage for fiduciary liability insurance
paid the claim, if you did not have a recourse rider, that insurance
company, in turn, could settle, pay for the claim and then go after
you because you were involved in the alleged breach.
Purchasing a non-recourse rider would prevent the insurance
company from going after the individuals who potentially might
have been involved in the breech. However, if the plan is paying
for the policy, it cannot pay for the non-recourse rider. That’s just
one of the many things you need to look at when you’re reviewing
Really make sure the plan sponsor understands what is considered to be a claim and when it starts, because oftentimes some of
these policies will pay a claim after the settlement.
You will want defense costs to be covered from the first day
that an investigation commences. We all know litigation can be
costly, so you want to look at a policy that kicks in from the day
the claim has been submitted. Just like in anything, when you’re
purchasing a contract—particularly insurance—you want to make
sure you really understand what you’re buying.n
This article has been prepared for informational/educational purposes
only. It is not intended to be an offer or solicitation of investment advisory services or products.
Neither New York Life nor its agents or affiliates provide tax or legal
advice. Plan sponsors should speak to their own tax and legal advisers
regarding their specific situation.
MainStay Investments is a registered service mark and name under
which New York Life Investment Management LLC does business. MainStay Investments, an indirect subsidiary of New York Life Insurance
Company, New York, NY 10010, provides investment advisory products
and services. Securities are distributed by NYLIFE Distributors LLC, 30
Hudson Street, Jersey City, NJ 07302.
Don Trone and Groom Law Group are not affiliated with NYLife Distributors LLC.