Legally Obligated To Look Out for Others?

Yes. Essentially, that’s what it means to be a retirement plan sponsor: under ERISA law, you are inherently a fiduciary. Simply put, being a fiduciary means you are legally obligated to act in the best interest of plan participants. You need to be more careful with their money, then your own. You can be held personally liable for mistakes or oversights, and you can never fully eliminate this risk, even through outsourcing.

Duty of Loyalty to Employees

ERISA attorney Fred Reish finds that retirement plan sponsors are often under the false and risky assumption that they are not fiduciaries, though in fact they are, and therefore, have a duty of loyalty to employees:  

I think one of the hardest things to understand about being a fiduciary is [knowing] what that means…For example, if you’re the person that makes a decision about whether to have a plan and what the terms should be, you’re considered a settlor for doing that. It means you’re the employer and can look out for the employer’s best interests. But once that’s done, and you implement the plan and select investment providers, you are a fiduciary. It’s something courts refer to as the ‘two hats’ doctrine. You take off one and put on the other….If your company has thousands of employees, it extends to people you don’t even know, but you have a duty of loyalty to act in their best interest….Sometimes it’s hard for people to grasp…Where else do you have a duty to look out for people before yourself? Family and maybe your close friends. That’s the best analogy I can think of for your fiduciary duty to take care of a participant.”

Former Assistant Secretary of Labor for the Employee Benefits Security Administration, Lisa Gomez cautions that plan sponsors, even with diligence, are prone to making mistakes, which can lead to major challenges: “Everybody makes mistakes from time to time, but there are lots of times where if a plan is doing certain things incorrectly as far as required and basic disclosure filings, then it’s an indication that there could be a bigger problem, and not really an understanding that they are wearing the fiduciary hat.” For example, late, incomplete or erroneous filings of Form 5500 can be an indicator that “Where there’s smoke, there’s fire. Where there are smaller issues, there’s probably some other issues.” Similarly, failure to have an active, up-to-date ERISA Fidelity Bond, as specifically required by the Department of Labor, can be a red flag for both the IRS and the DOL. 

Though required by law to protect the retirement plan against acts of fraud or theft, keep in mind that your ERISA Fidelity Bond does not protect you as the plan sponsor. Summing up, here are eight important points for retirement plan sponsors to understand–and act on: 

1. If you sponsor a retirement plan at your company, you are automatically a fiduciary under the high standards of a law called ERISA, which is enforced by the U.S. Department of Labor. 
2. Being a fiduciary means you are personally responsible for ensuring that the plan consistently benefits participants. 

1. Failures, including errors and oversights, can result in fines and penalties, as well as lawsuits–all of which put your personal assets at risk. 

1. You can never fully eliminate the risk of being held personally accountable to the plan, participants and beneficiaries.

1. Outsourcing plan services does not free you from your risks: as a sponsor, you choose the service providers and remain ultimately accountable for their success on behalf of plan participants and beneficiaries.

1. Specific examples of what you can be held personally accountable for as a fiduciary include:

• Decisions: Do you have the right advisor, and investment options? 

• Cost control: Are the plan fees reasonable and services solid?

• Compliance: Do operations adhere to the plan document, and government regulations? 

1. As a fiduciary, you can also be held accountable for failing to adequately mitigate cybersecurity threats to the plan, or to curtail the damage from a breach. You can also even be held responsible for failure to monitor your chosen service providers for their adherence to cybersecurity protocols. 
2. If you face claims that you have failed in your responsibilities as a retirement plan sponsor, the only type of protection that shields you personally is Fiduciary Liability Insurance—-with it, you’ll be armed with coverage for defense and penalties. Without Fiduciary Liability Insurance, your personal assets are exposed.

Help For Retirement Plan Sponsors

Colonial Surety Company offers an efficient and affordable Fiduciary+Cyber Liability Insurance bundle specifically to protect retirement plan sponsors.For a few dollars a day, you’ll be armed with: 

• $1,000,000 for Defense and Penalties if you are faced with alleged or actual breaches of fiduciary duty.

• Cybersecurity Coverage for the business and plan, which addresses Department of Labor recommendations, and includes expert response services to curtail damage after an incident. 

Get protected now: Fiduciary+Cyber Liability Insurance

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