YOUR BUSINESS AUTHORITY
Springfield, MO
People who manage a company's assets have a choice of bonds and policies
by Steven Diegel
SBJ Contributing Writer
Fiduciaries and financial advisers charged with managing and directing a company's investments, 401(k) and pension plans and other assets have a number of insurance options available to protect themselves and the companies they serve.
"There is some protection, such as fiduciary liability and fiduciary bonds," said Dick Jackson of Barker Phillips Jackson. "That does not cover the loss of the principal as a result of normal market forces, but it will cover it if someone steals it," he said.
Several policies, such as fiduciary responsibility insurance, directors and officers liability insurance, and errors and omissions liability insurance can protect a company against such problems as theft, fraud and mismanagement.
A number of bonding options are also recommended and often required for the fiduciaries themselves. These cover various amounts, though some industry regulations require a minimum of 10 percent of the plan's assets be covered.
"Normally, bonds are going to be more for wrongful acts like negligence, theft or fraud than anything else," said Jim Johnson, vice president of trusts and investment services at Mercantile Bank.
While claims are rare, area insurance representatives advise that these protective measures can be quite important to maintain not only for the company but the fiduciary, who can be held personally accountable for problems.
"A fiduciary can be personally responsible if something goes wrong with the 401(k) or the pension plans," said Robin Pennington, account executive at Man-Morris Insurors Inc. "While rare, there have been cases where the fiduciary's personal assets have been put on the line."
As these programs typically provide protection against high levels of assets, coverage does not come cheap. As a consequence, a company's premiums can run very high, and many individuals will take a second policy to cover the cost of their deductible.
"It depends upon the size of the plan," Jackson said, adding that individual coverage usually runs less than corporate rates.
Yet, in spite of the costs, greater numbers of fiduciaries, financial planners and advisers, and the companies who hire them are taking advantage of these coverage options.
"You are seeing more and more of it," Pennington said. "We try to offer it to about everyone, especially if they have a 401(k) or pension plan."
Companies are also taking steps to reduce the risks involved and consequently the money spent on insuring against those risks. A large number of fiduciaries are exercising a greater standard of care when making investments. Much of the risk is also increasingly being transferred directly to the employee, who has a greater say in selecting how and where to make investments.
"Most 401(k)s are self-directed because the employer does not want that endorsement liability," Jackson said. "They may offer some canned advice, but it is largely up to the individual to run within the confines of the plan."
In spite of these precautions and all the insurance and bonding available, outside of gross mismanagement or theft, little can be done in the event of an investment loss.
"Nothing covers sorry advice," Jackson said. "Typically, you understand your risk ahead of time."
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