PLANSPONSOR - August - September 2022 - 37

PROVIDER RELATIONSHIPS | FIDUCIARY INSURANCE
class actions against large plans remains
very high, according to Euclid Fiduciary, a
fiduciary liability insurance underwriting
company. By its count, 42 excessive fee
and imprudent
investment
cases were
filed against defined contribution plans
in the first half of this year, and 75 to 100
cases are expected for the full calendar
year. If the upper number is reached, it
will be the most suits in one year ever. In
2021, there were 54 cases, but 2020 saw a
record tally of 97.
A minimal
amount
of
coverage
would be $500,000 or $1 million,
Clarke says. However, if an organization
has significant financial assets and
employee benefit plans-for example,
$50 million or $100 million in a 401(k)-
then the sponsor needs more coverage.
How much,
though, " really becomes a
guessing game, " he says. " Benchmarking
services such as Zywave answer that
question about what similar-size organizations
carry in terms of limits. "
The cost of liability insurance is
increasing, too. According to Clarke,
pricing is being swept along in the tide
of underwriting and price firming in the
management liability insurance marketplace;
that upward trend began about two
years ago and continues, but is likely to be
less severe for renewals in the second half.
Based on more recent history, the first
million dollars of liability coverage ought
to cost the typical or average company
$1,200 to $1,500 for the annual premium,
he says. Yet, today, that same first million
might carry an annual premium of $1,800
to $2,200. -Judy Faust Hartnett
When Insurance Is Too Pricey
M
any plan sponsors see rising premiums for fiduciary liability
insurance, due to increased litigation targeting retirement
plans. PLANSPONSOR's " Ask the Experts " columnists
Charles Filips, Kimberly Boberg, David Levine and David Powell,
all attorneys with Groom Law Group, Chartered, and Michael
Webb, senior financial adviser at CAPTRUST, say there are alternatives
to dropping your insurance. These may be pursued independently,
or in combination, to potentially reduce costs:
1) Use plan assets to finance the insurance. Instead of paying
the premiums directly, you can draw from plan assets. But the
policy must permit recourse by the insurer against the fiduciaries
in cases of a loss owing to breach of fiduciary obligations.
The employer may purchase a waiver of this recourse provision,
but that must be paid by the employer directly. Still, that recourse
waiver premium may be more affordable to you as an employer.
2) Negotiate. Insurance renewal rates are often open to negotiation,
and any information you can provide the insurer that shows
prudent processes in performing your fiduciary duties can affect
negotiations positively. Sometimes, insurance underwriters are
unaware of the extensive efforts you make to ensure your plan
satisfies the Employee Retirement Income Security Act's fiduciary
requirements. It may be helpful to describe the fiduciary
governance practices and other controls you have in place such
as how the committee, in its meetings, reviews and/or reduces
the plan's investment options, eliminating revenue sharing or
rebating it back to participant accounts if a net fee fund is cheaper.
3) Consider a 3(38) investment manager. This is a more drastic
step than the above actions and should probably be pursued only
if those are unsuccessful, or if you have another reason to incur
the added expense associated with a 3(38), such as wanting to
get out of the business of selecting and monitoring investment
options. Although it is not clear that hiring a 3(38) will necessarily
lower your insurance premiums, that fiduciary reduces
your liability exposure, which could translate into lower costs in
the event of litigation. When you hire a 3(38), you are no longer
directly involved in selecting and monitoring plan investments;
the 3(38) performs that function for you and reports its actions to
the plan's fiduciaries. Plan fiduciaries are not completely off the
hook, though, as they still have the fiduciary duty to select and
monitor the 3(38) investment manager. Still, hiring a 3(38) may
mitigate the need for comprehensive fiduciary liability insurance.
4) Shop around. Presuming you used an insurance broker to
purchase the insurance, ask that professional to shop other alternatives
for you that might be less expensive.
5) Consider adding provisions to your plan document that might
reduce litigation risk. You may wish to discuss with your ERISA
counsel the possibility of adding language to your plan document-e.g.,
plan limitation period specifications, mandatory
arbitration clauses, class action waivers and venue provisions-
that might reduce risk in the event of litigation.
6) Consider adding cybersecurity insurance to your general policy,
if possible. Ostensibly, this is a counterintuitive step in an article
that addresses coping with unaffordable insurance expenses;
however, it is worth noting that cybersecurity insurance is increasingly
important to maintain even if it adds to the bill. Given the
significant
the insurance has become more important than ever. Moreover,
though it may not affect their own policy premiums, plan sponsors
may want to confirm that their recordkeepers and other providers
also maintain cybersecurity insurance.
PLANSPONSOR.COM August - September 2022 37
losses that may result from a cyberattack, having
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