401(k) Ruling by Supreme Court Begs Fiduciary Liability Consideration
May 19, 2010
By P. Noble Powell, Senior Vice President, Willis of Maryland

The recent February, 2008 ruling by the Supreme Court may very well create a new source of revenue for the plaintiff’s bar and elicit the need for further scrutiny in determining the value in securing fiduciary liability protection. Most of us have already seen the ruling that now allows individual 401(k) Plan participants to look to recover losses that they may allege were a result of a breach of a fiduciary duty. This decision affects over 50 million workers in the United States with close to $3 trillion in 401(k) assets… Statistically the likelihood of a 401(k) related claim just grew exponentially.

Those Investment Advisers that have secured Professional Liability (PL) a/k/a Errors and Omissions (E&O) insurance have in fact purchased Fiduciary Liability insurance. The SEC clearly considers Investment Advisers as having a fiduciary duty to their investors when they render investment advice coupled with having discretionary authority (and in many cases even non-discretionary authority) over their clients’ funds. Therefore the E&O coverage form that protects the Investment Adviser in the rendering of their professional services is providing Fiduciary Liability coverage.

Due to the recent ruling it is vitally important to work with your ERISA client Plan fiduciaries to make sure that they are providing guidance and the appropriate diversification in an ongoing effort to mitigate any potential suits from disgruntled Plan participants. Make jointly sure the investments are in accordance with any applicable ERISA regulations thereby affording your operations the potential use of the Section 404(c) safe harbor.

Please note that most all E&O policies for Investment Advisers specifically exclude coverage for the services that may be rendered to their own “in-house” Plan. However, the E&O programs for Investment Advisers may be endorsed with a Pension Trust Liability coverage form that will provide the necessary protection. That being said, we want to reiterate the need to consider the placement of this type of insurance (stand alone or via endorsement) in order to properly protect the Plan fiduciaries due to this new ruling.

This ruling did not effect the bond requirement under Section 412 of ERISA, as did the Pension Protection Act of 2006. The bond coverage is all about protecting against fraud and theft while the Fiduciary Liability coverage is going to provide defense/settlement for allegations of a breach of duty or loyalty and care on behalf of the 401(k) Plan and its individual participants.

If you have any questions or concerns related to this article please do not hesitate to contact us for further clarification.