Eliminating a Fiduciary Blind Spot

Jonathan Blaze   As the ranks of retirement plan fiduciaries continue to swell, so have the numbers of lawsuits filed and tried against plan sponsors and other fiduciaries for alleged breach of duty. In recognition of their risk, plan sponsors are increasingly seeking ways to ensure protection. One form of shield may be fiduciary liability insurance (FLI). Jonathan Blaze with Mainstay Investments spoke with PLANSPONSOR about this type of insurance, and what plan sponsors should know.

 PLANSPONSOR: When you look at the current environment for plan sponsors, what are they most challenged by in this uncertain fiduciary landscape? What are both advisers and plan sponsors looking to do, or what are the biggest obstacles to navigating?

Jonathan Blaze: I think the industry, in general, has attempted over the last 10 to 12 years to help evolve the knowledge base of plan sponsors as well as advisers. There’s a big element of education involved here. You’ve got to have an investment policy, perhaps a fee policy. You need to set up a committee, you need to have a charter of that committee to follow what’s required under ERISA [Employee Retirement Income Security Act] so that you are protected as a fiduciary of the plan and can’t be sued, or, if you are, that you’re not potentially risking your own personal assets.

PS: How are you at Mainstay helping advisers and plan sponsors navigate the renewed, or increased, focus on fiduciary responsibilities?

Blaze: When we were re-evaluating and restructuring our DCIO [defined-contribution-investment-only] effort within New York Life Mainstay Investments, we wanted to be an industry leader. We felt it was important to focus on governance—best practices for plan sponsors. Over the last year, we’ve created the Retirement Institute, geared toward financial advisers and consultants who primarily serve retirement plans, giving them access to topics such as fiduciary liability insurance. It’s an ongoing process of educating, adding value to the adviser and enhancing our relationship with the individual so that, hopefully, when opportunities arise, he will look to New York Life Mainstay Investments as a potential partner.

PS: Where does Mainstay find the fiduciary expertise and content that you’re disseminating through the Retirement Institute?

Blaze: We were fortunate enough that our outside ERISA counsel at New York Life is Groom Law Group out of Washington, D.C., and that Groom is one of the oldest ERISA law practice firms. We work closely with Steve Saxon and other members of the firm, who help us create content. We present to Steve topics we feel are relevant, obviously, arriving at those topics by asking our clients, the advisers, what’s on their minds, what they need clarification on, what would help them communicate their value-add proposition to clients and prospects, and what they feel are timely, relevant topics. 

PS: There are many plan sponsors concerned about their liability and making sure they’d like to do whatever they can to mitigate the likelihood of being sued. How are they currently mitigating their fiduciary liabilities?

Blaze: Everything within ERISA, it all comes back to the process, right? Using an adviser to guide them through those processes. Relying on an adviser is itself an indication of a procedurally prudent process. Once you get to the basis of your retirement program, established or re-established, then it’s making sure all the i’s are dotted and t’s are crossed and you have an investment policy statement [IPS] that provides that process for how you select and monitor investments. You may choose to establish an investment committee, and you have a charter that explains who should be on the committee, what their responsibilities are, how you bring people on, how you take people off the committee, things of that nature.

It’s an ongoing process of training these individuals because, typically, for members of investment committees, benefit committees, their sole job is not just running their 401(k) plans. If an adviser can add value by educating them further about how to be better fiduciaries, better stewards of the plan, it can minimize the potential for litigation. 

But, as we all know, we can be sued for anything, and that’s where the topic of FLI [fiduciary liability insurance] works so well. You really need to have the processes in place, and basically FLI will protect those fiduciaries on the committees, named fiduciaries, etc., from any potential claims even if a fiduciary is found to be at fault. 

When you look at it overall, for the cost and the types of coverage it provides, it’s not that expensive of an insurance. However, it’s established to cover breach of fiduciary duties. It’s paying the fees if you are charged through a DOL [Department of Labor] investigation or an IRS audit. Whereas the fidelity bond is simply just covering theft and fraud, fiduciary liability insurance is much broader and specific to ERISA.

PS: So is this good for all plan sponsors, or are there some for which this is more useful?  

Blaze: It’s for 401(k) programs and 403(b) defined benefit [DB] programs. Particularly with 403(b) plans, look at the lawsuits filed recently against many institutions of higher learning. Major universities—which are always touted as having phenomenal investment success in the way they manage their endowment foundations portfolios—look what’s happened to them, just as of last year. You were seeing fiduciaries of major Ivy League schools and other public and private institutions being sued for fiduciary breach. 

Therefore, I believe it’s definitely worth exploring, weighing out the cost basis, and, regardless of what happens with this DOL fiduciary rule, litigation will continue. We know there’s sensitivity to fees, there’s sensitivity to overall governance best practices, and what better way to protect you? Why would we drive a car without automobile insurance? Why would we own a home without protecting ourselves against theft, fire or whatever natural disaster that could cause us to lose our home? The same should be true of fiduciaries’ personal liability.

PS: What is fiduciary liability insurance, and what do plan sponsors need to be aware of?

Blaze: Fiduciary liability insurance has been around for a while. Again, it’s all about a process. The process needs to be undertaken by the plan sponsor, by the adviser working with the plan sponsor to explore the need to have fiduciary liability insurance coverage. If it’s being excluded from your officers’ and directors’ coverage and other forms, investigate and calculate what the costs would be to provide this type of coverage. It can be paid for by the plan or by the company, but there are many unintended consequences, and there is more involved than just buying a policy. First and foremost, how do you want to pay for this? It can be a plan expense, i.e., you can use the plan to pay for it. But there are some potential consequences if you do that, because purchasing fiduciary liability insurance is a fiduciary act in itself. For example, when the plan pays for the coverage, the individuals covered by the policy should obtain a “non-recourse rider,” the cost of which is usually modest.

With the Retirement Institute, the topic of fiduciary liability insurance is currently one of the three we offer. We have created not only a one-hour CE [continuing education] presentation that can be used to educate advisers or plan sponsors but be delivered by a representative of the retirement group within New York Life Mainstay. Or, if the adviser is comfortable, he could deliver that message and presentation.

PS: What do you think plan sponsors should most remember about FLI?

Blaze: It’s not as simple as just going out and purchasing a policy, because policies vary, based on the individual’s needs. What’s covered by the policy? What’s excluded? But one that always seems to get the attention of these individuals who are being asked to sit on investment committees and take the status of a fiduciary under ERISA. 

As I said earlier, fiduciary liability insurance, just like the fidelity bond, can be a plan expense. So, you could use plan expenses to pay for that cost. However, as noted in such cases you will need to obtain a non-recourse rider. If you were on an investment committee and facing litigation, and your insurance company that was providing the coverage for fiduciary liability insurance paid the claim, if you did not have a recourse rider, that insurance company, in turn, could settle, pay for the claim and then go after you because you were involved in the alleged breach. 

Purchasing a non-recourse rider would prevent the insurance company from going after the individuals who potentially might have been involved in the breech. However, if the plan is paying for the policy, it cannot pay for the non-recourse rider. That’s just one of the many things you need to look at when you’re reviewing these policies.

Really make sure the plan sponsor understands what is considered to be a claim and when it starts, because oftentimes some of these policies will pay a claim after the settlement. 

You will want defense costs to be covered from the first day that an investigation commences. We all know litigation can be costly, so you want to look at a policy that kicks in from the day the claim has been submitted. Just like in anything, when you’re purchasing a contract—particularly insurance—you want to make sure you really understand what you’re buying.

 This article has been prepared for informational/educational purposes only. It is not intended to be an offer or solicitation of investment advisory services or products.

Neither New York Life nor its agents or affiliates provide tax or legal advice. Plan sponsors should speak to their own tax and legal advisers regarding their specific situation. MainStay Investments is a registered service mark and name under which New York Life Investment Management LLC does business. 

MainStay Investments, an indirect subsidiary of New York Life Insurance Company, New York, NY 10010, provides investment advisory products and services. Securities are distributed by NYLIFE Distributors LLC, 30 Hudson Street, Jersey City, NJ 07302. 

Don Trone and Groom Law Group are not affiliated with NYLife Distributors LLC.

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