Owners Offering Employee Perks Need Protection
In this litigious age, the unhappy employee presents a threat to the success of any business. Good intentions count for nothing in safeguarding the employer with a faltering pension or profit-sharing plan.
Even with a simple 401(k) plan, it doesn’t matter that you have no power to influence what happens to your employees’ money once invested among, say, five mutual funds. It matters only that an unhappy employee may sue you if the funds don’t perform.
Why? The Employee Retirement Income Security Act, or ERISA, passed by Congress in 1974, imposes a special duty of care on the employer who establishes a pension or profit-sharing plan. The act requires that the fiduciary--often the employer who establishes a plan--manage it with the care of a prudent person “familiar with such matters.”
Lawyers call this the “prudent expert rule.” It saddles the business owner who acts as fiduciary of a pension or profit-sharing plan with personal liability to employees who stand to benefit from the plan.
Your first line of defense, of course, is to give your employees a wide range of investment options so they can satisfy their own investment goals.
Your second defense is to protect yourself with fiduciary liability insurance, available from insurers such as AIG and Chubb. The insurance, also known as pension trust liability coverage, protects you against losses for any wrongful act against people to whom you owe a fiduciary duty under ERISA.
No employer with even the simplest pension or profit-sharing plan should go without this insurance. Premiums begin at $5,000 or so for $1 million in coverage. As a rule, the insurance covers attorney fees in addition to any claims against a fiduciary.
“Fiduciary liability insurance covers mismanagement of the assets of a pension or profit-sharing plan to the detriment of a beneficiary,” says Rick Sarazen, an area vice president for Arthur J. Gallagher, a Woodland Hills-based insurance brokerage.
“The mismanagement doesn’t have to be intentional,” says Sarazen, who specializes in professional liability insurance. “If you invest the assets of a plan in pork bellies and they go south and you have no assets left in the plan, you can be sued by an employee who thinks you should have put the money into a bank CD at 5%.”
Employers with 401(k) plans run a lesser risk of such litigation than those with defined-contribution pension plans, Sarazen says. As the name implies, defined-contribution plans require the employer to contribute specified amounts to the plan each year. The benefit received by a retiring employee depends on the investment return of the plan’s assets.
Employers with defined-benefit plans run a high risk of litigation, Sarazen says. Defined-benefit plans commit the employer to providing a specified benefit to employees upon retirement, irrespective of the investment return on the assets in the plan.
“But even with a 401(k) plan,” Sarazen says, “if you give your employees five options among mutual funds, and they tank while the market as a whole goes up 20%, you can be accused of not providing your employees with quality choices.”
Litigation against employers with simple 401(k) plans is uncommon but not unheard of, Sarazen says.
“It’s cost-effective, and it’s foolish not to carry it,” Sarazen says. “Fiduciary liability insurance is the only way to cover the fiduciary risk.”
*
Freelance writer Juan Hovey can be reached at (805) 492-7909 or via e-mail at jhovey@gte.net.
