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Benefit plan sticker shock: Don’t drop the ball on fiduciary liability insurance

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In the midst of the COVID-19 pandemic and the ensuing volatility of the economy, companies and their employees are facing unprecedented economic challenges. In many cases, this sudden economic shift has significantly affected the value of employee benefit plans. Companies should consider these mounting risks to assess whether a claim related to its sponsorship, oversight, or administration of an employee benefit plan may be imminent, and whether fiduciary liability insurance may be available to neutralize any potential financial risk.
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Potential claims related to the COVID-19 pandemic

The COVID-19 pandemic and the associated financial crisis have taken their toll on employee benefit plans. Investments across the stock market dropped overnight, and unemployment rates have skyrocketed. Many companies have been forced to furlough employees and to consider downsizing in order to remain in business, forcing many employees to consider early retirement. In addition, the precipitous drop in the financial markets has negatively affected investment funds in which many public and private employee benefit plans invest employee assets, including the termination and liquidation of several large hedge funds, resulting in significant losses to plan beneficiaries. As this market volatility continues, companies that sponsor plans, the plans themselves, and third parties that administer or provide financial or consulting services to employee benefit plans may face a growing risk of liability under the Employee Retirement Income Security Act of 1974 (ERISA or the Act), which regulates employee benefits plans, and related laws.

When an employee benefit plan does not perform as expected, as may be the case during the COVID-19 pandemic, plan beneficiaries might allege that the plan was mismanaged and seek legal recourse under ERISA or other laws. Allegations could include failing to prudently invest or diversify the assets held by the plan, failing to exercise supervisory control over financial advisors to the plan, and failing to advise plan participants of the risks inherent in certain plan investments. ERISA provides several causes of action for breach of fiduciary duty, including:

  • Misleading or negligent advice on investing the plan’s funds;
  • Imprudent or negligent investment practices, including failing to diversify plan assets or charging excessive fees;
  • Imprudent selection or monitoring of third-party service providers; and
  • Administrative errors resulting in lost benefits.

The standard that will be applied is an objective, “prudent” one: “A fiduciary’s investments are prudent if s/he has given appropriate consideration to those facts and circumstances that are relevant to the particular investment involved and has acted accordingly. ‘Appropriate consideration’ includes a determination by the fiduciary that the particular investment is reasonably designed to further the purposes of the plan, taking into consideration the risk of loss and the opportunity for gain, in addition to consideration of the portfolio’s diversification, liquidity, and projected return relative to the plan’s funding objectives. In addition, under trust law, a fiduciary normally has a continuing duty of some kind to monitor investments and remove imprudent ones. In other words, we must focus on whether the fiduciary engaged in a reasoned decision-making process, consistent with that of a prudent man acting in a like capacity. Courts have readily determined that fiduciaries who act reasonably – i.e., who appropriately investigate the merits of an investment decision prior to acting – easily clear this bar.” Pfeil v. State Street Bank & Trust Co., 806 F.3d 377, 383–85 (6th Cir. 2015) (the General Motors Corp. ‘stock drop’ case from the Great Recession).