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) was enacted more than 40 years ago, fiduciaries of employee benefit plans have been held personally liable for a breach of their obligations. Yet many fiduciaries are unaware of this liability, and sometimes that's because they simply don't know they are considered fiduciaries.

Fiduciary status is based on the functions performed for the plan, not just a person's title. A fiduciary is anyone who exercises discretionary authority over plan assets, has control over plan management, or has authority over administration. For example, a court in Florida initially held that a CEO could be a fiduciary by reason of the fact that he signed a benefits check.

It's an increasingly complicated landscape. Agents can provide great service to clients, helping them navigate risks, and offering solutions to protect themselves and their businesses.

Fiduciary obligations

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

1. A fiduciary must discharge his or her duties with regard to the plan solely in the interests of the plan participants for the purpose of providing benefits to plan participants and their beneficiaries. Part of that duty entails defraying reasonable plan expenses.
2. Fiduciaries must act with the care, skill, and diligence that a prudent 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 duties identified by ERISA can result in liability. Plan participants, beneficiaries, healthcare providers, and the government can hold fiduciaries liable for failing to exercise prudence in selecting plan vendors or investment options. Other common risks for fiduciaries include being accused of selecting more expensive plan options, failing to diversify plan assets, and failing to follow the terms of the plan documents.

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

[Related: Fiduciary in limbo]

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

Emerging exposures

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

Managing the risk

As our society has become increasingly litigious, the need for fiduciary liability insurance has grown. Fiduciary liability insurance helps cover costly defense expenses and settlements or verdicts when there is an actual, or alleged, breach of fiduciary duty.

Such coverage is not available under D&O policies, which generally exclude ERISA violations. ERISA generally requires plans to purchase ERISA Bonds, but those bonds cover the plan only for a loss caused by theft, and not lawsuits by third parties. Employment Benefits Liability (EBL) coverage is generally limited to negligent distribution of information, record keeping, and enrollment. It normally excludes liability imposed under ERISA for a breach of fiduciary duty.

Helping clients understand the penalties that are assessed under these acts in the event of a claim for breach of fiduciary duty adds tremendous value for customers with this exposure. Given the complexity of ERISA, the myriad of duties it imposes, and the establishment of personal liability for those serving as fiduciaries, going without insurance can be a truly risky choice. That's why it's important for agents to take the time to educate clients about their risks. If something goes wrong, clients will be thankful agents helped protect their bottom line.

Christopher Williams is the Fiduciary Product Manager for Travelers. When Christopher joined Travelers in 1999, he worked in the home office as a claim manager on fiduciary, employment practices, directors and officers and miscellaneous professional liability claims. He was subsequently promoted to manage those claims for privately held companies and non-profit organizations on a countrywide basis. In that role, he managed a claim staff, implemented claim handling strategies, consulted on underwriting issues, and was involved in policy drafting. Christopher has spoken at industry conferences such as PLUS, RIMS and URMIA. Prior to his insurance experience, he worked as a social worker in Springfield, Massachusetts. In 2013, Christopher transitioned to his current role where he is responsible for the fiduciary underwriting strategy, marketing, training, and consultation on complex fiduciary accounts. In that capacity, he has served as a resource for underwriters on the PPACA.

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An opportunity for agents: The growing importance of fiduciary liability insurance

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