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Warranties and guarantees come to the 401(k) game but can insurance really put the client first?

Unwilling to stomach new legal exposure, employers -- and their advisors -- are looking to buy protection

Author Lisa Shidler August 27, 2014 at 3:25 AM
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Jay Wells: Fees have become a huge concern. I'm talking to more plans about fiduciary insurance.

401(k) Stories

Fiduciary Advisor Advocate

Fiduciary Advisor Advocate

August 27, 2014 — 1:31 PM

Not exactly an apples to apples comparison but in the same church as they say. If you look at the history and examples of plan sponsors believing they could lay of the financial aspects of fiduciary risk- it doesn’t work all that well. Anyone remember Executive Life? That was a mess! Besides- any insurance policy is only as good as the underwriters ability to pay in the event of an event.

The only way I can see to mitigate fiduciary risk is to have a well documented, repeatable and defendable process in place…don’t see that as much in the sub $250M marketplace. There is no magic pill to ease the concern and no free comfort food. There are however well established processes and protocols available.



August 28, 2014 — 12:51 PM

As marketed today, fiduciary warranties are often specific to outsourced 3(16) fiduciary services, not investment performance or fees. 3(16) services are rarely, if ever, offered by advisors. They are offered by TPAs and recordkeepers. While generally offered by bundled providers, some TPAs are now offering the service as an overlay. In addition to the various types of policies, insurance and warranties are quite different. Additionally, warranties may or may not be backed up by an insurance policy.

E&O professional liability insurance (purchased by advisors & TPAs) and fiduciary liability insurance (generally purchased by plan sponsors) are quite different. Additionally, they do not reflect another layer of needless fees of dubious value. The majority of E&O coverage, not fiduciary liability insurance, is substandard. However, the quality policies provide valuable coverage for a reasonable fee. As with any purchase, the content of the policy and the warranty should be vetted carefully by a professional with the proper background. The same applies to fiduciary services.

Fiduciary services, vendor credibility/capability and warranties cannot be lumped together. Some are very valuable and of high quality while others are marketing hype. Observers that fail to grasp these dynamics are simply misinformed and out of touch with an evolving marketplace.

Given that compliance has become near impossible, outsourced 3(16) fiduciary services are headed for the mainstream. Rather than drinking dated Kool Aid, advisors would be wise to identify, vet and develop the capabilities to monitor these service providers. Like HSAs, 3(16) services and MEPs are headed for the mainstream. Indeed, sponsors are increasingly seeking these services. Advisors who fail to acknowledge this will be breathing the exhaust fumes of the 500 hp GT convertible driven by their competitors. In short, the charlatans, credible service providers, specific services, warranties, insurance, bonding and the service umbrella are quite different and should be viewed accordingly.

Competitively priced outsourced 3(16) services provided by a credible vendor willing to accept a fiduciary role while offering a warranty that is backed up by first, third or first and third party fiduciary liability insurance have real value. They are not a gimmick. The insurance policy approach is far more advantageous than the deep pocket vendor approach for too many different reasons to highlight in this limited response space. Given the growth potential, these services will be thoroughly discussed at the CFDD ’14 Advisor Conference.

Paul Smith, NAPLIA SVP

Paul Smith, NAPLIA SVP

September 2, 2014 — 12:46 PM

It’s good to see Advisor and Plan Sponsor fiduciary matters coming into the mainstream discussion. With so many moving parts, it’s easy for the discussion to get off center. I think Phil did a good job of clarifying some issues that I would have otherwise addressed.

It was mentioned in the article that I (NAPLIA) do not have RIA clients that take on fiduciary responsibility. I’m compelled to clarify that we insure hundreds of RIA’s that take on a fiduciary role – generally in the investments space, but occasionally in a Named Fiduciary Role in the qualified plan space. Additionally, we have several TPAs and standalone Consultants acting as 3(16) and 402 Fiduciaries that we insure for the delivery of their Professional Services.

Language itself can create or add to the confusion, as we talk about warranties in the Plan Provider or outsourced fiduciary space. When a outsourced Plan Fiduciary has correctly written E&O coverage, and extends their 1st Party coverage (written properly and backed by a A Rated carrier) to all their fiduciary clients – it’s a best case arrangement.

As Phil also mentioned, I will be speaking on this subject at CFDD next month.

Stephen Winks

Stephen Winks

September 2, 2014 — 2:54 PM

There is an insatiable demand for innovation, but is the innovation what it seems. Not really.


Mentioned in this article:

Pension Resource Institute, LLC
Compliance Expert
Top Executive: Jason C. Roberts

Retirement Law Group, PC

Top Executive: Jason C. Roberts

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