ERISA’s enduring legacy and the evolving impact on fiduciaries

In 2024, the Employee Retirement Income Security Act reaches a significant milestone — its 50th anniversary. This moment highlights ERISA’s enduring role in protecting employee benefits and emphasizes the importance of establishing clear swim lanes for those managing retirement plans, known as fiduciaries. ERISA outlines the responsibilities of fiduciaries, mandates employee dishonesty insurance and holds fiduciaries personally liable for breaches of their duties.

Today, ERISA continues to be enforced. Most recently, Bank of America faced a lawsuit alleging a fiduciary breach involving the misuse of forfeited funds. This comes on the heels of a similar claim against Wells Fargo. The rise of these litigation cases further highlights the relevance and impact of ERISA.

As ERISA reaches its 50^th anniversary, exploring its origins and evolution is essential to gain a proper perspective of what may come down the road and the continued impact on the role of fiduciaries.

A journey back to the beginning

ERISA was enacted into law in 1974 and went into effect on Jan. 1, 1975. Its basis stemmed from the concern of employers mismanaging employee benefit funds. Although, at the time, the main retirement benefit was corporate pensions calculated based upon years of service and annual salary, ERISA was enacted to protect employees’ retirement benefits. Over the years, ERISA has experienced various amendments to meet employees' needs and demands of current times. The law applies to nearly all employee benefit plans, including group health and similar group insurance plans.

It's important to note that ERISA requires insurance for employee dishonesty, referred to as a fiduciary bond. With a strong emphasis on placing responsibility upon organization management, ERISA maintains that anyone with discretionary authority over an employee benefit plan is personally liable for such actions. This strong language makes fiduciary liability insurance of the utmost importance to protect fiduciaries and employers against claims of mismanagement.

The provisions of the SECURE Act

Over the years, employee lifestyles, longevity and financial planning have evolved. Recent concerns have focused on American workers struggling with retirement planning and ultimately not having the necessary resources to fund retirement lifestyles. The government has recognized these concerns and shifts and has responded accordingly. Not long ago, President Joe Biden signed The Consolidated Appropriations Act of 2023, including the SECURE 2.0 ACT of 2022, into law. SECURE 2.0 is the evolution of the 2019 Setting Every Community Up for Retirement Enhancement Act, which intended to expand access to retirement plans and provide more guidance on plan administration. SECURE 2.0 is a robust addition with over 90 provisions addressed or implicated. It brings new details and considerations for company retirement fiduciaries to navigate, some with effect dates in 2025.

The DOL fiduciary rule

Compounding this is the new Department of Labor's new Retirement Security Rule, often called the DOL fiduciary rule, which introduces potential challenges for managing retirement plans. Although  the rule is still being tested in the courts, it introduces criteria for classifying fiduciaries. Once finalized, this change could potentially increase liabilities for employee benefit plan sponsors and employers in cases of allegations from employees, customers or regulators.

The need-to-know information for fiduciaries navigating ERISA

As a best practice for risk management and navigating the growing trend of litigation, fiduciary liability insurance should be at the top of the list for fiduciaries and their organizations. Typically sold in increments of $1 million, this insurance offers valuable protection against allegations of improper judgment related to employee benefit plans, including, and most importantly, covering defense expense in such cases.

Moreover, as cyber breaches increasingly target organizations, fiduciaries need to recognize that the employee data they manage is sensitive and attractive to cyber criminals, making them vulnerable to cyber incidents. While cyber insurance is not a requirement under ERISA, the DOL has issued cybersecurity best practices for retirement plan sponsors, fiduciaries, recordkeepers and participants. It would be wise for fiduciaries to take the lead in acquiring cyber insurance as a safety net against an inevitable cyber breach.

As ERISA continues to evolve, we expect the next 50 years to bring an onslaught of new requirements as government officials address the ongoing financial security concerns of the aging population. However, one thing is certain—the longevity of ERISA is a testament to the potency of its framework in protecting working Americans' retirement planning.

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Richard Clarke is chief insurance officer at Colonial Surety Co. Contact him at [email protected].