HomeBusiness InsuranceRetirement Insurers Adapt to Opportunity, Risks Under 401(k) Law

Retirement Insurers Adapt to Opportunity, Risks Under 401(k) Law

Business insurance underwriters who shield retirement plans when they run afoul of federal benefits laws are eying legislation Congress passed last year to encourage new 401(k)s as a growth opportunity, though they also anticipate hurdles.

Fiduciary liability insurers want to capitalize on what they’re hoping will be a wave of new small employers venturing into the private-sector retirement market and needing new coverage under the SECURE 2.0 Act (Pub. L. No. 117-328).

The law enacted Dec. 29 earmarks new tax credits for small employers to cover the costs of setting up a plan and will establish new starter-401(k) designs next year that are intended to eliminate some of the headaches associated with plan development. Those two provisions alone could add 19 million new workplace savers to the market, according to the American Retirement Association.

The pandemic economy wasn’t kind to retirement plan insurers over the past three years, as class action litigation spiked premiums and deductibles between 15% and 20% on average, Marsh & McLennan Cos. Inc. data show.

The fact that insurers are jostling for new business could reflect SECURE 2.0’s broader impact on the US retirement market. Product modifications underwriters are making now spell out the risks and pitfalls small employers may fall victim to as they implement plan design options under the new law.

“While clearly SECURE 2.0 is aiming to encourage plan adoption, I think it’s important for people to understand that it’s not like a blanket safe harbor for a small employer,” said Wendy Katherine Von Wald, assistant vice president and fiduciary product manager at Travelers Cos. Inc. “There still are administrative burdens.”

Specialized But Important

Fiduciary liability coverage is often overlooked by small employers, overshadowed by directors-and-officers products or fidelity bonds benefit plans are required to secure, said Thomas Bentz Jr., a partner at Holland & Knight LLP who specializes in business insurance.

When plan participants sue their employers for breaching their strict fiduciary standards of conduct under the Employee Retirement Income Security Act of 1974 (Pub. L. No. 93-406) or for plan administration errors, there’s no other type of coverage other than fiduciary liability to protect employers from being held personally liable.

“It’s specialized, but extremely important,” Bentz said. “It can be difficult to get that message across.”

The number of class action lawsuits challenging retirement plans over plan administration and fiduciary conduct for monitoring fees skyrocketed in 2020. Litigation doesn’t show signs of dropping yet, said Von Wald. That means the cost of insuring large businesses in particular is rising too, she said.

The plaintiffs bar has begun to turn its attention to smaller plans, but the cost of insuring those plans still hasn’t reflected it. Underwriters are trying to navigate tough conversations with business owners who think litigation risk management is a scalable problem.

Last year, 40% of lawsuits were filed against plans with less than $1 billion, Von Wald said. Yet, premiums for account balances totaling around a million dollars can easily stay under $2,000 a year, said Daniel Aronowitz, managing principal at Euclid Fiduciary Managers LLC.

“Too many small employers think, ‘My employees would never sue me,’” Aronowitz said. “Then they do.”

Pooled Pitfalls

Savvy insurers are trying to steer their products to meet new demands under SECURE 2.0, said Richard Clarke, chief insurance officer at Colonial Surety Co.

Covered fiduciaries should be aware of what type of qualified decisions they make if they choose to adopt new SECURE 2.0 measures to their plan that would allow student loan repayments to be taken into consideration when calculating 401(k) matches or if they install emergency savings accounts to their plans, Clarke added.

Both SECURE 2.0 and its predecessor, the SECURE Act of 2019, encourage small employers to adopt plans by joining pooled investment vehicles such as pooled employer or multiple employer plans.

In some cases, retirement plans comprised of several distinct employers have named fiduciaries that make investment and administrative decisions. But that doesn’t absolve individual employers of all fiduciary liability, said Von Wald.

“Selecting and monitoring that provider is the function of a fiduciary,” she said. “Those employers can be served by insuring those decisions.”

Liabilities may be eased under provisions in the law that encourage the use of Labor Department and IRS self-correction programs and language that eliminates a requirement that retirement plans seek to recollect overpayments.

“This is a robust and competitive market,” said Clarke. “Insurers are going to want to retool their products to meet fiduciaries’ new needs.”

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