Like many employers your firm may offer employee benefits like a 401K plan or health insurance. Such benefits can help attract new workers and retain existing employees. Yet, the administration of employee benefit plans may create liability under a federal law called the Employee Retirement Income Security Act (ERISA).

ERISA was initially intended to prevent the mismanagement and abuse of private pension plans.


Since its passage in 1974 the law has been amended several times. It now applies not only to retirement plans but to plans that provide medical, dental, vision, child-care and other types of benefits as well.

Under ERISA an individual who manages a benefit plan or a plan's assets is called a fiduciary. The law assigns fiduciaries certain duties. For instance, a fiduciary must act solely in the interest of plan participants or their beneficiaries. He or she must also follow the plan documents and carry out his or her duties prudently.

A fiduciary that fails to fulfill his or her obligations under the law may be held personally liable for losses sustained by participants or their beneficiaries. This means that a fiduciary's personal assets may be used to pay damages awarded to a plaintiff in a lawsuit.

What Is a Fiduciary?

ERISA defines fiduciary as someone who uses discretion in administering and managing a benefit plan or who controls a plan's assets. A fiduciary has the authority to make decisions about the manner in which plans are overseen and implemented.

Here are some examples of decisions that a fiduciary might make:

• Which bank to use as the administrator of a pension plan
• Which investments to include in a 401K plan
• What wording to include in a 401K plan summary distributed to participants
• Fees paid to a third-party administrator of a trust fund used to pay medical expenses under a self-insured health plan

The fact that a person makes benefits-related decisions does not mean that person is a fiduciary. Both employers and employees may make decisions that are non-fiduciary in nature.

Business Decisions

Many of the decisions employers make about benefit plans are considered business decisions, not fiduciary decisions. Here are some examples:

• A decision to offer a medical plan to employees
• A decision to convert a defined benefit pension plan to a 401K plan
• A decision regarding the types of benefit options to include in a cafeteria plan
• A decision to stop offering vision benefits to employees

Decisions by Non-fiduciary Employees

Employees may make benefits-related decisions while acting as non-fiduciaries. Suppose that your company offers a 401K plan to employees. Jim, an employee in your firm's Human Resources department, is responsible for enrolling workers in the plan. Jim performs his duties based on the policies and procedures you have established. He has no authority to decide how the plan is administered or how the assets are managed. Jim's duties are ministerial, not fiduciary. 

While Jim may not qualify as a fiduciary under ERISA, clerical errors he makes may generate lawsuits. For example, Jim could fail to enroll an employee in the plan or provide inaccurate information to an employee about the plan. Either mistake could cause an employee to lose benefits. The employee might then sue Jim and/or your firm for compensatory damages. You can protect your firm and your administrative employees against such suits by purchasing employee benefits liability insurance. This coverage may be added via an endorsement to your general liability policy.

Fiduciary Liability Coverage

If you or an employee makes an error while serving as a fiduciary of a benefit plan, the error may cause plan participants or beneficiaries to suffer a loss. Those participants or beneficiaries may then file a lawsuit against you or your employee. You can protect your firm and your employees against such suits by purchasing fiduciary liability coverage. The latter is a type of errors and omissions liability coverage. It will be explained in a separate article.