Fiduciary Exposures

Many private and public companies have reduced or eliminated some employee benefits in recent years, leaving themselves exposed to potential fiduciary liability lawsuits. Employees and retirees who see their pension savings and other company benefits wither away often respond by suing their employers, benefits administrators and plan fiduciaries.

In addition to purchasing adequate fiduciary insurance coverage, business owners can help protect their company, benefits administrators and plan fiduciaries from liability by implementing certain risk-mitigation steps. Below are just a few of the areas business owners need to be concerned about:

  • Stock drop litigation: Many 401(k) plans allow participants to purchase in their individual accounts securities of the sponsor company. Although this has been a common practice for years, a new breed of litigation against fiduciaries has emerged. When the sponsor announces surprising adverse news and the market price of its securities takes a sudden drop, securities class-action lawsuits frequently are filed by shareholders against the company and its directors and officers, alleging misrepresentations and omissions of material facts before the sudden stock drop.
  • Legal compliance: A constant and challenging responsibility of fiduciaries is to ensure that the plan and trust documents and operations are in full compliance with all applicable laws. Because of the constantly changing legal requirements applicable to employee benefit plans, a comprehensive and continuing program to monitor legal developments is essential.
  • Employee stock ownership plans: Because of the potential for actual or perceived abuse of participants in an ESOP, fiduciary liability exposure is significant.
  • Labor–Management plans (sometimes called Taft–Hartley plans): These may be formed pursuant to collective bargaining agreements and present several unique liability exposures that require specialized loss prevention efforts.
  • Fees to service providers: Fiduciaries inevitably hire various service providers for the plan. When the fees for those services are paid out of plan assets, fiduciaries should ensure that the fees are reasonable in light of the services provided.

Learn more about suggested step-by-step loss-prevention procedures for publicly owned and privately held companies.

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