P/C coverages that retirement advisors should know

Retirement plan professionals have knowledge in the areas of investments, financial literacy and retirement readiness. Many of us are either bound to act in the client’s best interest or hold ourselves out in a fiduciary capacity. The overriding goal is to protect the client as best as possible.

Establishing a qualified retirement plan exposes the plan sponsor, who is usually the employer, as well as the advisor, to liability. This column focuses on the employer. While the employer may attempt to mitigate liability, they cannot eliminate it. 

This leads us to the three methods of risk management that are not related to an Employee Retirement Income Security Act of 1974 plan. First, we can avoid the exposure; however, the decision has been made to establish the plan, and therefore avoidance is not an option. 

Second, we can self-insure the risk. Certainly, this may work, considering business owners tend to take on an elevated level of risk. In 2023, ERISA fiduciary breach settlements ranged from $200,000 to $60 million, according to Goodwin Law. Of course, these will vary by size of the plan and the nature of the breach, but does the employer want to chance this, considering the litigious environment? It takes only one disgruntled employee. 

Third, we can put the exposure on a third party, an insurance company, by insuring it. Through a more detailed risk management assessment, we may want to have a combination of self-insurance and third-party insurance.

Although the retirement plan professional may not be licensed to sell property/casualty coverages, I believe the professional should at least be aware of these coverages and recommend the client review these topics with their property and casualty professional. Many retirement plan professionals are accustomed to doing this with professionals in other fields. 

Those of us who are not licensed in the tax or legal fields may not provide tax or legal advice; therefore, we collaborate closely with the client’s other trusted professionals when considering and establishing a plan. The P/C professional is no different and should be engaged when it comes to these topics. 

This is not an exhaustive list of P/C coverages but is limited as it relates to an ERISA plan. In general, there are three P/C coverages to become familiar with.

The ERISA fidelity bond is a requirement, with limited exceptions. Every person who handles plan funds must be adequately bonded. The bond will cover the plan, not the individuals, against loss by reason of acts of fraud. This obligation to purchase the bond is outlined in ERISA and the Department of Labor regulations. Fraud or dishonesty includes risks of loss that might arise through dishonest or fraudulent acts such as larceny, theft, embezzlement, forgery and misappropriation, among others. The protection of the plan is paramount and covers the plan even if the person committing the act obtains no personal gain from committing the act or the act is not subject to punishment as a crime or misdemeanor.

The fidelity bond is inexpensive as compared to the assets and number of plan officials handling plan assets. However, it is frequently overlooked. Line 9d on Form 5500 will state whether the plan has a bond. Failing to acquire the bond on the Form 5500 can trigger a plan audit, and the plan fiduciaries can be held personally liable for losses that should have been covered by the bond.

The next coverage that is gaining attention is cyber liability. The more we automate our business, the further connected we are, distancing ourselves from the act by a click of the button. Both cyber claims and frequency have increased. According to “The State Of Active Insurance: 2024 Cyber Claims Report” from The Coalition, the average cost of a data breach in the U.S. was $4.35 million in 2022.

Considering the type of data that is being transmitted when an employer establishes a plan, coupled with the fact that each employee is providing personal data to enroll, a breach could be costly. Some areas that are covered by a cyber policy include and may not be limited to data breach response, business interruption, data recovery, extortion, legal fees and settlements, network security and privacy liability, digital asset destruction, system failure, and social engineering and cybercrime.

The next coverage is employment practice liability insurance. EPLI is broad coverage that covers a range of claims made by employees against the employer. The area that interests the retirement plan advisor under EPLI is claims related to the improper management of employee benefits. There are other coverages under EPLI, such as coverage for breach of employment contract, failure to promote, deprivation of career opportunity, retaliation, wrongful discipline and discrimination, to name a few.

It has been my experience that mentioning these coverages adds value to the overall process of establishing a retirement plan and shows professionalism by identifying potential risks and collaborating with other allied professionals.

Ernest J. Guerriero, CLU, ChFC, CEBS, CPCU, CPC, CMS, AIF, RICP, CPFA, national president of the Society of Financial Service Professionals, is the director of qualified plans, business markets for Consolidated Planning. He may be contacted at [email protected].