With litigation on the rise, experts say that it is more important than it has ever been for retirement plan sponsors to have adequate fiduciary insurance. And as a result of the increase in litigation, carriers have become more selective about sponsors they will cover.
“These are interesting times right now,” says Rhonda Prussack, senior vice president and head of fiduciary and employment practices liability at Berkshire Hathaway Specialty Insurance in New York. “There is a tremendous amount of class action litigation naming plan sponsors and their agents, particularly with respect to private company employee stock ownership plans (ESOP) and fees. None of this litigation seems to be slowing up. In fact, those claims are going more and more down market, particularly the fee cases. Everyone has to be aware of their fiduciary duties, make sure they have processes in place around these duties and work with an insurance broker to make sure they have adequate fiduciary insurance coverage in case they are sued.”
As to how much insurance a sponsor needs, generally 10% of the plan assets is a good rule of thumb, Prussack says. However, the sponsor has to consider the “size of the plan and the complexity,” she says. “That answer might change if the plan is an ESOP sponsored by a non-publicly traded company. It is not uncommon for companies with large plans with $1 billion or more in assets to purchase towers of insurance of $75 million to $100 million or more.”
A tower is created by coverage by several insurance carriers, explains Nancy Ross, a partner and head of the Employee Retirement Income Security Act (ERISA) Litigation Practice at Mayer Brown in Chicago. “If you want $100 million in insurance, you certainly might have different carriers,” Ross says. “Generally, one carrier will only provide up to a certain level of coverage, say up to $25 million. Then the next two might each cover $15 million apiece.”
While 15 years ago, fiduciary coverage was typically a rider to a company’s directors’ and owners’ (D&O) policy, fiduciary insurance coverage has since been carved out as a standalone, Ross says. If a sponsor thinks their D&O coverage extends to fiduciary insurance, they could be in for a surprise, she notes.
When assessing how much insurance to have, it is critical for sponsors to consider how high their defense costs could run, Ross says. “In a complicated ERISA class-action lawsuit alleging fiduciary breaches, your defense fees can run anywhere from $10 million to $20 million. So, if they run on the high side and you have a $50 million policy, will the remaining $30 million be enough to cover the cost of being hit with a judgement?”
What fiduciary insurance carriers consider when assessing retirement plans
Should a company be turned down for insurance by one carrier, this would not put a Department of Labor (DOL) audit target on their back because the DOL would only discover that once an investigation had begun, Prussack says.
If a claim is made against a company, it could result in their being unable to obtain fiduciary insurance for several years, says Nathan Boxx, director of retirement plan services at Fort Pitt Capital Group in Pittsburgh.
When assessing whether or not to take on a sponsor as a client, the insurers “have really sharpened their pencils,” Ross says.
First and foremost, she says, “they are looking to see if there has been a history of litigation and claims filed against the company. The other big consideration is the company’s fiduciary governance structure. They want to see if there is a fiduciary committee in place and if the proper delegations are in place to give the committee the authority to run the plan. Is there an investment policy statement? How often do they meet? Do they have plan counsel and an adviser? All of these factors would arguable mitigate the risk of being sued.”
Prussack agrees: “Insurers really like to see that there is as much expertise as possible in running the plans. If they have a 3(21) or 3(38) fiduciary, we would view that as a positive. As ERISA requires that plan fiduciaries exercise an expert level of prudence and the folks managing their plans typically lack that level of expertise, we would view it as a positive.”
Berkshire Hathaway Specialty Insurance also looks to see “if the company is financially stable, whether there have been any DOL audits, or any delayed contributions to the plan. Those are typically the types of problems you will see in smaller plans,” Prussack says.
“With larger plans, we delve more deeply into the plan’s financial history and investments and how they are performing,” she adds. “We look at how robust their fiduciary process is for selecting and monitoring investments and third-party providers, whether it is the recordkeeper or the investment managers. We also delve deeply into how they assess fees to the plan and the participants. We look to see if there have been any changes to the plan that might upset participants, such as termination or annuitization of a defined benefit plan, a change in the investment lineup, a cut in retirement benefits or an increase in costs passed along to retirees. We really try to examine the totality of the risk and look for the kinds of behaviors that could trigger litigation or make participants upset.”
Other red flags that carriers look for are offering company stock in the plan or whether or not they are an investment firm offering proprietary funds, Ross adds.
As for what sponsors should look for when selecting a carrier, they definitely should get multiple quotes and bids, look at the carrier’s claims paying ability and frequently reevaluate their insurance coverage to ensure it is adequate, Boxx says.
“One thing I think is valuable is to look for a carrier that has operated in the space for a while and is familiar with the lawsuits,” Ross advises. “A good carrier will know the plaintiffs’ attorneys, how they operate and what they are looking for, be that a settlement or to push forward with the lawsuit. That can help the sponsor brainstorm for the best defense strategy.”