Factors That Can Cut the Cost of Fiduciary Liability Insurance

The pace of litigation against retirement plan sponsors continues to increase, with excessive fee lawsuits dominating headlines.

Fiduciary liability insurance underwriter Euclid Specialty has said claims are so commonplace that fiduciary liability insurance could disappear. “Insurance companies have paid well over $1 billion in settlements, but this economic model cannot continue,” Euclid notes.

Plan sponsors should know there are certain risks insurers identify that affect a plan sponsor’s insurability and the pricing of insurance. Aon recently surveyed 12 top carriers for fiduciary liability insurance to understand their views on the biggest sources of fiduciary risk within the control of fiduciaries for defined benefit (DB) and defined contribution (DC) plans subject to the Employee Retirement Income Security Act (ERISA).

According to an Aon client alert, questions about fee levels and structures, as well as processes for reviewing fees, ranked as top drivers of fiduciary liability insurance premiums. In Aon’s survey, 88% of respondents said whether the investment committee does periodic plan administration fee benchmarking reviews is a “significant” driver of insurance premiums. For DC plans, 75% of respondents said whether plans use mutual funds generating revenue sharing or subtransfer agency (sub-TA)-type revenues and 63% said mutual funds using retail share classes would be significant drivers of premiums.

Offering company stock in a DC plan with no cap on how much company stock participants can hold also rated as a top driver of fiduciary liability insurance premiums, selected by 88% of survey respondents. That figure dropped to 50% when there is a limit on the size of such investments.

Nearly 40% of respondents to Aon’s survey said whether the plan uses managed accounts has a significant impact on insurance pricing. Jay Desjardins, senior vice president at Aon, shared that one carrier explained, “The market assumed that the question referred to ‘actively’ managed accounts which are typically associated with higher fees than ‘passively’ managed accounts and, hence, the impact on insurance pricing.”

Investment advisers are viewed as a moderate influencer of premiums; however, nearly 40% of respondents said it matters which firm is a plan’s investment adviser. According to Desjardins, the same carrier explained, “If the firm doesn’t have a known reputation in the investment space or has an unproven investment history, the concern from the carrier side is the potential liability of selecting this firm over the vast available options. This becomes a bigger risk as the plans increase in size. Or if the investment adviser has a negative performance history, why is the plan taking a chance with this firm over the various other available options? The rating impact is relevant when these characteristics are a part of the decision.”

Overall, Aon says, factors that can help lower pricing “fall under the themes of good governance: having the right people and resources to act in the best interest of participants, while documenting the processes and decisions well.”

Good Governance Practices Are Key

Fiduciary liability insurers have been looking for good governance practices for years.

Speaking at the 2019 PLANSPONSOR National Conference (PSNC), Rhonda Prussack, senior vice president and head of fiduciary and employment practices liability at Berkshire Hathaway Specialty Insurance, explained that fiduciary liability insurance is designed to protect fiduciaries from personal liability imposed on them by ERISA for breaches of fiduciary duty even if those breaches are inadvertent or unknown. For example, if plan fiduciaries get sued, a fiduciary liability policy will initially start advancing payment for defense bills. If the lawsuit is settled by plan fiduciaries, the insurer will contribute some, and sometimes all, of the settlement amount.

She said that when determining whether to insure a plan sponsor and its fiduciaries, insurance underwriters put themselves in the shoes of plaintiffs’ lawyers and seek out the types of behavior they are looking for. “For example, whether recordkeeping fees are based on plan assets or are a flat fee; whether the plan has robust processes; whether plan fiduciaries know their role, meet routinely, benchmark fees and have a process for getting rid of underperforming funds; and whether they do an RFP [request for proposals] every three to five years to make sure the plan is using the best provider and getting the best value,” she explained.

During a 2018 webinar, Nancy Ross, a partner and head of the ERISA Litigation Practice at Mayer Brown in Chicago, said that when fiduciary liability insurance carriers assess a retirement plan, a 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,” she said. “Is there an investment policy statement [IPS]? 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, who also participated in the webinar, agreed, saying: “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.”