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How well do your clients understand fiduciary liability?


A recent study of more than 250 insurance agency professionals by Travelers Insurance Co. found that a majority of those surveyed said they don't believe their clients understand when they have a fiduciary duty. I recently spoke with John Trefry, fiduciary liability product manager for Travelers bond and financial products, about the survey and its significance.

Q: What was the genesis of the survey?

A: We set out to determine where company-sponsored retirement and health plan fiduciary education gaps, and consequently exposures, may exist. The survey results strongly suggest some significant gaps when it comes to clients' understanding of fiduciary liability.

Agents believe that more than half of clients—54%- generally do not understand if they have a fiduciary duty. Further, when asked to name the top three reasons clients don't purchase fiduciary liability insurance, 79% of agents said clients “don't feel like there is an exposure.” Unfamiliarity with the Employee Retirement Income Security Act's broad definition of “fiduciary” and the high standards of care by which fiduciaries are bound can result in very costly mistakes. This lack of awareness and education is directly responsible for many executives not procuring adequate fiduciary liability insurance.

Q: What were the most important findings from an agent/broker perspective?

A: What is clear from the survey is that fiduciary liability needs to be better understood. Unfortunately, the education gap that exists is often a case of “you don't know what you don't know.” As such, we've worked to develop a list of need-to-know facts about fiduciary liability:

• Under ERISA, anyone responsible for managing retirement or health plan assets or has discretionary responsibility for a plan's administration is a fiduciary –typically, the employer, their boards, and executive officers

• ERISA fiduciaries may be held personally liable for any breach of ERISA's strict duties, including the duties of loyalty and prudence

• There are residual duties and potential liabilities associated with reliance on the services of outside investment managers

• ERISA lawsuits are prevalent, expensive and frequently disposed of in favor of plaintiffs

• Imprudent investing is not the only exposure of ERISA plan fiduciaries

• An employer's exposure to ERISA lawsuits may be increased by employee layoffs and terminations

• ERISA section 404(c)'s “safe harbor” protections require more than offering a diverse selection of mutual funds, and the protections aren't as broad as some think

• The DOL and IRS are showing signs of greater interest in ensuring 401(k) plan compliance

• Unlike fiduciary liability insurance, most forms of insurance (e.g., employee benefits liability (EBL) and ERISA fidelity bonds), typically do not cover a liability for breach of fiduciary duty under ERISA

Q: What was the most surprising finding, and why?

A: Understanding what leads to claims is an important part of the selling process. A third 33% of agents said claim examples are the number one piece of support they need to sell more fiduciary liability insurance. Working with a provider who can share these examples can be incredibly effective in illustrating a client's exposure. For example, a small business may not realize they have fiduciary liability exposure because of their size, industry or employee base. Using tools like claim examples, can be an impactful way to illustrate the value of fiduciary liability coverage.

If clients aren't aware of problems and don't understand the ramifications of their risks, this provides agents great opportunities to offer guidance, best practices and coverage recommendations. Any good agent knows that relationships with clients are just as important as the products they sell. Agents have the opportunity to point out an overlooked problem; educate clients about what that problem means for their business and provide solutions. These survey results show opportunities for sales and relationship growth. It also means there is an opportunity for agents to brush up on their understanding of fiduciary liability. They should work with their carriers; or consider taking a class; or bring an expert in to the agency for a firm-wide seminar. The opportunity for agents in the fiduciary liability space is large – but agents need to understand what they're selling and why in order to be the best advisors possible.