The best fiduciary insurance spells out exactly what it will cover.

Defined contribution plan sponsors have come under a lot of legal and regulatory fire in recent years, as have the warranties and fiduciary insurance policies that were supposed to protect them. 

“If a plan sponsor is really concerned about their personal liability — and I meet few who are not — then they need to know the fine print of those warranties and fiduciary insurance policies they are paying good money for,” said Jason Roberts, a Manhattan Beach, California-based ERISA attorney.

The good news is that sponsors and advisors are getting more sophisticated about it, and insurers are responding with more comprehensive policies. The problem, however, is far from resolved. 

Roberts said there was a time, not so long ago, when sponsors carried only “fiduciary warranties,” contracts that insinuated comprehensive fiduciary coverage for plan sponsors. 

“The coverage looked pretty good to sponsors, because what they typically claimed to guarantee was that part of ERISA that requires a sufficiently broad range of funds for participants,” explained Roberts. 

But the reality is that the protection afforded by these policies was “skimpy,” according to Roberts. 

In part, that’s because it’s rare for a sponsor to be sued for not offering a broad enough range of investment options for their participants. More typically, sponsors are sued over fees, they are sued over share class, and they are sued for disclosure practices, among other things. 

“Basically, warranties offer coverage for something you are not going to be sued over,” said Roberts. “It’s not hard to meet ERISA’s standards for investment offering. Everyone knows to balance menus with equity funds and fixed-income funds.” 

“It’s the ticky-tack stuff that regulators look at and that leads to further inspection of sponsors’ activities — the missing black-out notice, and incomplete Form 5500 — the small stuff that opens the door to further liability,” Roberts said.

The best fiduciary insurance spells out exactly what it will cover.

Roberts says policies should address three “buckets”: investments, selection of plan service providers, and administrative reporting. 

Warranties too often lull sponsors into complacency, but tend to only cover the first area of risk. “I’ve never seen a warranty that covers buckets two or three,” Roberts said. 

Roberts says warranties only work well in conjunction with a first-party fiduciary liability insurance policy. 

“If fiduciaries can be held personally liable, then they need to know where they’re covered,” he said. “What if they sign off on a third-party administrator’s filing and it’s not accurate? That fiduciary is liable.” 

No matter the scope of the coverage, Roberts warned that “nobody’s writing fiduciary policies that allow sponsors to just throw it on autopilot. The world of insurance contracts is much more complicated than that.” 

Like more and more ERISA specialists, Roberts likes the idea of his clients making use of an advisor with expertise in ERISA section 3(38), which helps shift some of the liability. 

On the other hand, sponsors should remember that they can never really remove fiduciary liability from their plate. “Sponsors have to adequately monitor the RIA’s work and document that they are doing so. Just because you use a qualified RIA doesn’t mean you get to wash your hands of risk,” Roberts said. 

As the 3(38) option grows more attractive to sponsors, and the attorneys advising them, the question of their own fiduciary risk has come into play. According to Roberts, a lot of RIAs are “naked on the fiduciary liability side.” 

Tom Schrandt says those RIAs are not only naked, but they have no idea of it. 

The Philadelphia-based Schrandt started an insurance brokerage dedicated to providing professional liability coverage to financial advisors and accounts. Early in 2014, he merged with Lockton Affinity, an arm of Lockton that specializes in designing customized risk management protections for various industries. 

“Fiduciary liability” is a term Schrandt says RIAs often don’t really fully understand. 

Unlike named fiduciaries in a sponsor’s plan, an RIA’s fiduciary risk is often covered under their E&O — errors and omissions — policies, explained Schrandt. 

The thousands of RIAs who work for independent broker-dealers are covered under master policies issued to their BD. But Schrandt said a lot of those master policies — “at least 40 percent” – explicitly exclude ERISA coverage. 

“We see holes in the policies broker-dealers offer their RIAs all of the time,” Schrandt said. 

Fortunately, he said, “awareness of the lack of coverage is growing, as more RIAs hunt for more 401(k) business, and as more ERISA litigation is brought forth.”

It’s not just fiduciary liability protection RIAs are too often without. Plan sponsors are required to be bonded under section 412 of ERISA, in the event of fraud or dishonesty on the part of a plan fiduciary. But 412 extends to RIAs working in a fiduciary role, said Schrandt, and often RIAs don’t realize that.

“I know for a fact that there are 3(38) RIAs operating without required ERISA bonding. And they have no idea they’re in breach,” he said. 

Wendy Von Wald, an attorney and Fiduciary Liability Product Manager with Chubb, notes that even the best policies are meant to cover errors in the administration of a plan, not willful violations of the law. 

All of the fiduciary litigation over the past 10 years hasn’t dramatically increased the cost of coverage, she said. In fact, it has created a positive outcome for many plan sponsors. 

“It’s made a lot more sponsors rightfully concerned about ERISA. That’s made them more compliant. And that makes them easier to insure,” said Von Wald.