Fiduciary Warranty From indemnification to process

In their 2014 white paper titled Fiduciary Warranty: Marketing Gimmick or Fiduciary Protection, Gary Sutherland and Paul Smith from North American Professional Liability Insurance Agency, LLC analyzed benefits and shortcomings of fiduciary warranties. Sutherland and Smith note that plan sponsors demanded help from retirement plan providers to comply with high fiduciary duty outlined in the 1974 ERISA legislation. Providers developed programs that indemnified plan sponsors from participant claim liability and legal expenses provided that certain guidelines were met. After the U.S. department of labor began emphasizing process, programs changed into fiduciary warranties. Such warranties focused more on developing a sound process to comply with fiduciary duties rather than on indemnification. Plan sponsors still think warranties can protect them from lawsuits. A UnifiedTrust survey done in 2009 and 2010 reports that 52% of plan sponsors believe that a fiduciary warranty will be a valid defense against a participant lawsuit.

fiduciary warranties Fiduciary Warranty
Fiduciary Warranty

Fiduciary Warranty Limited scope with a indemnification focus

This warranty type prompts plan sponsors to use funds within the plan provider’s platform. Plan sponsors as a result comply with ERISA’s requirement to provide a broad array of asset classes for long term investing. Plan providers added qualified default investment alternatives (QDIA) to the mix. Plan sponsors retained fiduciary responsibility; they authorized providers to use QDIA and an array of funds for their retirement funds. Sponsors wanted more support from providers to help participants evaluate alternatives. Providers delivered providing more sophisticated fund evaluation tools. Provider indemnification language was narrowed to cover losses by plan sponsors not covered by insurance or any other source.

Fiduciary Warranty Defined scope fiduciary warranties include outsourcing of fiduciary duty

Defined scope warranties were introduced in the multiple employer plan (MEP) space. Providers that are consultants or record keepers take fiduciary responsibilities as a plan administrator or fiduciary and as an investment manager. Note that plan sponsors assume fiduciary duty by selecting a MEP or other plan provider and delegating fiduciary responsibilities to it. If there are issues with services that participants bring up with legal action, plan providers indemnify sponsors for damages paid and legal expenses. However, defined scope warranties have exclusions and conditions that limit coverage. Gary Sutherland and Paul Smith believe that plan sponsors should not rely on defined scope warranties alone for protection. Instead, sponsors should consider having a fiduciary insurance policy, in their view.

Fiduciary Warranty Broad scope fiduciary warranties using a first party insurance policy

An insurance policy is at the heart of broad scope fiduciary warranties. The policy is a contract with conditions, terms, and certain exclusions. Like other types of insurance, broad scope fiduciary warranties are state regulated. The warranties are designed to protect both plan sponsors and parties who assumed fiduciary duty on behalf of sponsors including record keepers and investment managers. Sutherland and Smith note that broad scope fiduciary warranties can provide a specific protection benefit for liability, usually $1 million to start. Sponsors can request higher limits as needed.