CERTIFICATION & DISCOUNTS
ERISA ADVISOR INSURANCE & BONDING
Based upon our own experience with advisor evaluation, bonding and insurance coverage is almost ALWAYS inadequate. Background checks uncover some type of potentially disqualifying information on approximately 5% of the advisors scrutinized. Additionally, the majority of insurance claims are linked to employee theft.
Unlike the legal requirements applicable to ERISA Bonds for sponsors and ERISA Investment Bonds for advisors, the law does not require plan sponsors to purchase fiduciary liability insurance or advisors to purchase E&O insurance. On the other hand, ERISA’s prudent man standards impose an obligation on sponsors to minimize the risk of loss by ensuring their service providers have adequate coverage.
ERISA Bonds and ERISA Investment Bonds are designed to protect employee benefit plans from the risk of loss due to theft, embezzlement, fraud or dishonesty. Opinions vary, but advisors who have ANY ability to commit fraud or dishonest acts - conditions applicable to most advisors and/or their employees - are required to be bonded. This is particularly important if the advisor has the ability to withdraw their fees without prior approval.
While many advisor bonds are limited to specific plans and do not provide coverage for new plans, the blanket approach covers their book of business. Some plans may, however, require a scheduled bond that names their plan and includes higher limits.
Unlike bonds, E&O Insurance protects advisors from losses due to actual or alleged negligent acts, errors or omissions committed in the scope of their duties as an investment advisor. They may not realize it, but most advisors lack coverage for fiduciary services provided to ERISA plans. The appropriate RFP questions specific to insurance coverage are beyond this release, but services covered, limits, deductibles, exclusions (including 3(21) & 3(38) carve outs) and endorsements must all be reviewed by an expert.
Documentation of coverage is starting to be demanded by plan sponsors because a Certificate of Insurance is not sufficient. The coverage is essential because one out of seven professionals will be named in some type of claim and even when unwarranted, lawsuits are expensive to defend. Indeed, the costs could bankrupt a small firm.
Employee Dishonesty Insurance
Unlike E&O insurance, Employee Dishonesty Insurance protects non-ERISA funds from theft. Advisors who limit themselves to plan level services may not need the coverage, but since it may not be possible to fully monitor advisors and/or cross-selling team members, savvy sponsors are increasingly requiring this coverage.
E&O Insurance & Bonding Certification
Plan sponsors have not yet taken advisor due diligence seriously. If background checks were run on all retirement plan advisors of record tomorrow, 5-10% would probably be replaced immediately. If the advisor’s insurance and bonding was subjected to meaningful due diligence by qualified experts, more than half would probably be replaced or required to upgrade their coverage.
In an increasingly competitive world, the importance of insurance and bonding certification cannot be overemphasized. For more information, including discounts available to CFDD attendees, email CFDD@TheCFDD.com.