Financial risk is hard enough to manage when you're aware of it.When you're not – hold on to your wallet.

Since the Employee Retirement Income Security Act (ERISA) wasenacted more than 40 years ago, fiduciaries of employee benefitplans have been held personally liable for a breach oftheir obligations. Yet many fiduciaries are unaware of thisliability, and sometimes that's because they simply don't know theyare considered fiduciaries.

[Related: Can fiduciary insurance manage PPACAexposures?]

Fiduciary status is based on the functions performed forthe plan, not just a person's title. A fiduciary is anyone whoexercises discretionary authority over plan assets, has controlover plan management, or has authority over administration. Forexample, a court in Florida initially held that a CEO could be afiduciary by reason of the fact that he signed a benefitscheck.

It's an increasingly complicated landscape. Agents can providegreat service to clients, helping them navigate risks, and offeringsolutions to protect themselves and their businesses.

Fiduciary obligations

What exactly are the obligations of a fiduciary? ERISA outlinesthem in these four points:

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   1. A fiduciary must discharge his or her duties with regard to theplan solely in the interests of the plan participants for thepurpose of providing benefits to plan participants and theirbeneficiaries. Part of that duty entails defraying reasonable planexpenses.
   2. Fiduciaries must act with the care, skill, and diligence that aprudent person acting in a similar situation would.
   3. A fiduciary must diversify plan assets.
   4. Fiduciaries have an obligation to follow plan documents.

What are the potential costs?

In some cases, failure to carry out any one of the dutiesidentified by ERISA can result in liability. Plan participants,beneficiaries, healthcare providers, and the government can holdfiduciaries liable for failing to exercise prudence in selectingplan vendors or investment options. Other common risks forfiduciaries include being accused of selecting more expensive planoptions, failing to diversify plan assets, and failing to followthe terms of the plan documents.

Exposures to fiduciaries can be significant. The 10 largestERISA class action settlements exceeded $1.3 billion in 2014,according to Seyfarth Shaw's 2015 Workplace Class ActionReport. The Employee Benefits Security Administration (EBSA),the government agency responsible for overseeing employee benefitplans, also reports closing nearly 4,000 investigations in 2014 andrecovering $599 million.

[Related: Fiduciary in limbo]

As an example, under section 502(c) of ERISA, an employer can befined $100 per day for failing to provide a plan document within 30days of receiving a request from a participant. A court may alsoaward attorney's fees for violations. In addition, under the HealthInsurance Portability and Accountability Act (HIPAA), thedisclosure of confidential health information by employers managinghealth plans can result in penalties of up to $1.5 million.According to the Department of Health and Human Services – whichmandates the reporting of breaches involving personal healthinformation under HIPAA – 31 million records were reported breachedin 2014.

Emerging exposures

Beyond traditional ERISA exposures, the Patient Protection andAffordable Care Act (PPACA) is adding another level of exposuresfor fiduciaries. For example, Section 1514 requires large employersto report whether full-time employees are offered minimum essentialhealth insurance coverage or face a $100 per person penalty.

Managing the risk

As our society has become increasingly litigious, the need forfiduciary liability insurance has grown. Fiduciary liabilityinsurance helps cover costly defense expenses and settlements orverdicts when there is an actual, or alleged, breach of fiduciaryduty.

Such coverage is not available under D&O policies, whichgenerally exclude ERISA violations. ERISA generally requires plansto purchase ERISA Bonds, but those bonds cover the plan only for aloss caused by theft, and not lawsuits by third parties. EmploymentBenefits Liability (EBL) coverage is generally limited to negligentdistribution of information, record keeping, and enrollment. Itnormally excludes liability imposed under ERISA for a breach offiduciary duty.

Helping clients understand the penalties that are assessed underthese acts in the event of a claim for breach of fiduciary dutyadds tremendous value for customers with this exposure. Given thecomplexity of ERISA, the myriad of duties it imposes, and theestablishment of personal liability for those serving asfiduciaries, going without insurance can be a truly risky choice.That's why it's important for agents to take the time to educateclients about their risks. If something goes wrong, clients will bethankful agents helped protect their bottom line.

Christopher Williams is the FiduciaryProduct Manager for Travelers. When Christopher joined Travelers in1999, he worked in the home office as a claim manager on fiduciary,employment practices, directors and officers and miscellaneousprofessional liability claims. He was subsequently promoted tomanage those claims for privately held companies and non-profitorganizations on a countrywide basis. In that role, he managed aclaim staff, implemented claim handling strategies, consulted onunderwriting issues, and was involved in policy drafting.Christopher has spoken at industry conferences such as PLUS, RIMSand URMIA. Prior to his insurance experience, he worked as a socialworker in Springfield, Massachusetts. In 2013, Christophertransitioned to his current role where he is responsible for thefiduciary underwriting strategy, marketing, training, andconsultation on complex fiduciary accounts. In that capacity, hehas served as a resource for underwriters on the PPACA.