Options When Fiduciary Insurance Is Too Expensive

“We are a museum that sponsors an ERISA 403(b) plan. Our fiduciary liability insurance premiums increased five-fold this year, to an amount that we can no longer afford to pay. Other than doing without the insurance, what are our options?”

Charles Filips, Kimberly Boberg, David Levine and David Powell, with Groom Law Group, and Michael A. Webb, senior financial adviser at CAPTRUST, answer:

This is a timely question, due to the higher premiums for fiduciary liability insurance that many plan sponsors are experiencing due to increased litigation. And, though the insurance is technically not a requirement of the Employee Retirement Income Security Act (ERISA), doing without it would be a bad idea since your plan would potentially be exposed to uncapped liability in the event of litigation.

Fortunately, there are several alternatives to dropping your insurance that can be pursued independently or in combination with one another to potentially reduce overall costs, as follows:

1. Use plan assets to pay for the insurance—Instead of paying the insurance premium directly, you can pay it from plan assets. However, as our Ask the Experts column on this issue points out, the policy must permit recourse by the insurer against the fiduciaries in cases of a loss owing to breach of fiduciary obligations. The employer can purchase a waiver of this recourse provision, but that must be paid by the employer directly. However, that recourse waiver premium may be more affordable to you as an employer.
2. Negotiate—Insurance renewal rates are often open to negotiation, and any information that you can provide to the insurer that is evidence of prudent process in performing your fiduciary duties can impact negotiations in a positive way. Sometimes, insurance underwriters simply do not understand the extensive efforts you are making to ensure your plan satisfies the fiduciary requirements of ERISA. To help insurers understand your efforts to reduce litigation risks, it may be helpful to describe the fiduciary governance practices and other controls in place with respect to the plan. Actions and processes that should be described include, but are not limited to, the following: the process for evaluating the reasonableness for service provider fees, fee benchmarking, committee meetings where the committee reviews and/or reduces the plan’s investment options, eliminating revenue sharing or rebating it back to participant accounts (if a net fee fund is cheaper), engaging a 3(38) Investment manager (see item 4 below), and confirming that the plan is in the lowest cost available share class.
3. Shop around—Presuming that you used an insurance broker to purchase the insurance in the first place, ask the broker to shop other alternatives for you that might be less expensive.
4. Consider a 3(38) investment manager—This is a more drastic step than the above actions and should probably only be pursued if the above actions are unsuccessful, or if you have another reason to incur the added expense associated with a 3(38), such as a desire to get out of the business of selecting and monitoring investment options. Although it is not clear that hiring a 3(38) will necessarily lower your insurance premiums, a 3(38) reduces your liability exposure, which could translate into lower costs in the event of litigation. When you hire a 3(38) investment manager, you are no longer directly involved in the selection and monitoring of plan investments; the 3(38) performs that function for you, and merely reports its actions to the plan’s fiduciaries. Plan fiduciaries are not completely off the hook, however, as they still have the fiduciary responsibility of selecting and monitoring the 3(38) investment manager, However, hiring a 3(38) may mitigate the need for comprehensive fiduciary liability insurance.
5. Consider adding provisions to your plan document that might reduce litigation risk—Per this PLANSPONOSR article on the subject, you may wish to discuss with your ERISA counsel the possibility of adding language to your plan document, such as plan limitation periods, mandatory arbitration clauses, class action waivers, and venue provisions, that might reduce risk in the event of litigation.
6. Consider adding cybersecurity insurance to your general policy (if possible)—Ostensibly, this is a counterintuitive step in a column that addresses coping with unaffordable insurance expenses; however, it is worth noting that cybersecurity insurance is increasingly important to maintain even if it adds to the bill. Cybersecurity risks for benefit plans continue to grow, particularly in the current remote environment. Given the significant losses that may result from cybersecurity incidents, maintaining cybersecurity insurance has become more important than ever. Further, although it may not affect their own policy premiums, plan sponsors may wish to confirm whether recordkeepers and other service providers also maintain cybersecurity insurance.

NOTE: This feature is to provide general information only, does not constitute legal advice, and cannot be used or substituted for legal or tax advice.

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