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Despite Court Decision, Few 401(k) Plan Sponsors Buying Fiduciary Insurance

March 27, 2008
Related Topics: Finance/Taxes, Retirement/Pensions, Workforce Planning, Latest News
In the weeks following a groundbreaking Supreme Court case allowing individual 401(k) participants to sue employers, lawyers have been recommending that advisors require plan sponsors to purchase fiduciary insurance.

The idea is simple, but the execution is challenging and a bit frightening for advisors who fear they might lose business because plan sponsors may not want to pay the extra cost, said Jason Roberts, a lawyer with Edgerton & Weaver in Hermosa Beach, California.

If plan sponsors don’t want to pay for the insurance, he said, they can just find another advisor.

The Supreme Court decision involved James LaRue of Southlake, Texas, who filed a suit claiming that the value of his stock holdings fell $150,000 when administrators at his retirement plan didn’t follow his instructions to switch his assets. The Supreme Court decided that individual participants can sue plan administrators.

Roberts now advises all of his broker-dealer clients to require their plan sponsor clients to purchase fiduciary insurance. But not all broker-dealers are ready to force their clients to pull the trigger, he said.

Ironically, fiduciary liability insurance isn’t that costly, said Tom Henell, vice president of North American Professional Liability Insurance Agency LLC, based in Framingham, Massachusetts. His firm, which specializes in writing liability insurance, began selling fiduciary liability insurance about four years ago.

The price of this insurance varies, but a plan with $50 million in assets would pay $3,000 to $5,000 annually.

Despite the modest cost, advisors are concerned about requiring their plan sponsor clients to purchase it.

“While it doesn’t cost that much, a small-business owner will think twice about it, and it’s sad,” said Christine Soscia, an advisor with Las Vegas-based InVest Financial Solutions for Business.

Terrence Morgan, an advisor and president of Oklahoma City-based OK401k Inc., which advises companies on their 401(k) plans, said there was no way he would require his plans to purchase fiduciary insurance. Addressing the topic with the smaller firms that he works with poses a huge challenge, he added.

“The average American who is a fiduciary in their plan has no idea what their vendors are supposed to do or what a consultant is supposed to do. When you talk to them about these issues, they think you’re speaking Russian,” said Morgan, who works with companies whose plans average $1 million in assets.

When he brings up the subject of fiduciary liability insurance to his clients, however, they do not usually have a positive response, Morgan said.

“They don’t want to talk to you,” he said. “They think you’re a shoe salesman trying to sell something. It’s extremely difficult.”

About 20 percent of his plans have purchased fiduciary insurance.

Soscia said she has begun investigating fiduciary insurance because of the LaRue case. Her firm manages about $120 million. Although none of her clients purchased the insurance in the past, she has recently gotten phone calls inquiring about it. But she is not eager to require that they purchase it.

“This is all such new stuff,” Soscia said. “I think any plan is subject to any litigation. The smaller plans can be ripe for picking because those are the ones that are less protected.”

She worries that plan sponsors will become so preoccupied with legal threats that they will forget about the actual purpose of the 401(k) plan.

“This opens a whole new can of worms. As a small-business owner myself, it makes me nervous that one of my employees can sue me personally for losses in their account,” Soscia said.

However, the LaRue case has been a wake-up call for plan sponsors, said David M. Snetro, a senior vice president at RDM Financial Group in Westport, Connecticut.

“The trustees are finally saying, ‘Oh my God, we didn’t realize we had all of this responsibility,’ ” he said.

Snetro’s firm manages about $650 million in assets. While he encourages the purchase of fiduciary insurance, he does not require it.

“Clients are nervous,” he said. “They’re worried about the ex-law partner who comes back with a $450,000 balance and says, ‘I didn’t know about those hidden fees. I should have a $700,000 balance.’ ”

Currently, less than 25 percent of his clients purchase fiduciary insurance, but he said the number has risen in the last year.

Rather than just discussing insurance, Rick Shoff, a Philadelphia-based senior vice president and advisor with Captrust Financial Advisors, has been advising his clients about how to prevent lawsuits. The firm manages more than $20 billion.

“The LaRue case gave us an opportunity to talk about it again,” he said. “We really focus more on prevention and not necessarily insuring what could possibly go wrong.”

Currently, his firm has about 100 plans that purchase the insurance. A year ago, only a handful had it.

If the cost is a sticking point, advisors should let their clients know how much they might have to pay to defend a lawsuit, said Christine Dart, a worldwide fiduciary liability manager for Warren, New Jersey-based Chubb Corp.

In smaller lawsuits, she said, defendants can pay $350,000 in legal fees. Such fees in larger lawsuits usually run between $2 million and $5 million, Dart said.

“When you look at those costs to a small employer, if they don’t have a fiduciary policy, can they afford to fund those kinds of litigation costs in today’s market?”

Filed by Lisa Shidler of Investment News, a sister publication of Workforce Management. To comment, e-mail

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