Twenty years ago, it was common for fiduciary insurance to be a relatively simple, bundled portion of a company’s overall Errors and Omissions (E&O) coverage. Occasionally, it would be necessary to bring a claim under a fiduciary insurance policy.
However, the world has changed. Today, given the volume of litigation and DOL enforcement involving 401(k) plans that make the news almost daily, fiduciary insurance is often a “must do” item for plan sponsors and their plan fiduciaries. The cost to insurance carriers of providing coverage under these policies is also rising.
This situation leads advisors and their clients to greater concerns about cost, process items to comply with and policy coverage considerations to consider and address as part of a plan sponsor’s annual renewal process. So where to begin?
First, there is the application for insurance. Each year, when renewing coverage, a plan sponsor and its plan fiduciaries will likely need to submit an updated information package/application to a carrier. Applications can vary slightly from insurance carrier to insurance carrier, but they generally ask about fees levels, funds utilized, and whether plaintiffs lawyers have contacted the plan sponsor or plan fiduciaries. Since these applications are part of the underlying policy, accuracy is key—and that is where an advisor can help ensure data and information is correct. A collaborative effort between key stakeholders—which may include internal personnel, the plan advisor, insurance brokers and legal counsel—can help make this process efficient.
Second, while there have long been limits on certain features of fiduciary insurance coverage, such as for voluntary compliance filings, the current renewal cycle is bringing to light more focus on deductibles (how much an insured party has to pay before insurance begins to pay for costs) and additional limits on specific portions of coverage. For example, some policies have added sublimits for 401(k) fee litigation and have restrictions and rules for defending cases which include limits on the choice of counsel. Careful attention to these issues by a plan sponsor and its plan fiduciaries, advisors and attorneys can be a proactive way to ensure that if coverage is needed because of a regulatory investigation or lawsuit, it matches the need when it arises.
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Separately, aside from being at the ready to help with these two items, there’s an additional proactive step an advisor can take to be a strong partner to its plan sponsor and plan fiduciary clients in helping them through the insurance application and renewal process. It is for the advisor to have all potentially necessary information at the ready for the renewal process—either as a package or from its regular periodic meetings. Having a summary of the fee structure, the funds chosen and the availability of other share classes of chosen funds can help make the process far less burdensome for the advisor’s client—and thus further support their relationship.
Lastly, on a related note, it is always helpful for advisors to have their own insurance for fiduciary or similar claims. This coverage is often provided through E&O insurance programs, including through programs like those maintained by the American Retirement Association and NAPA.
Obtaining and renewing insurance has become increasingly complex, but through preparation and coordination, an advisor can help his or her clients navigate the insurance process more easily—and be sure that their insurance is ready if that rainy day comes.
David N. Levine is a principal with Groom Law Group, Chartered, in Washington, DC. This column appears in the latest issue of NAPA Net the Magazine.
