In the Driver’s Seat

In the spring of 2021, Aon Investments surveyed 12 top carriers for fiduciary liability insurance to better understand how plan management typically impacts pricing for fiduciary liability insurance. The ultimate goal was to identify the biggest sources of fiduciary risk within the control of fiduciaries for Employee Retirement Income Security Act of 1974 (ERISA) defined benefit and defined contribution plans. Survey findings were published in Aon’s July 2021 white paper, “What Drives Fiduciary Liability.” Below are a few key highlights from the survey.

Fees are very important

Fees ranked as top drivers of fiduciary liability insurance premiums. Specifically, 88% of respondents said that it was a “significant” driver of insurance premiums if the investment committee does periodic plan administration fee benchmarking reviews. For defined contribution plans, 75% of respondents said that it was a significant driver of insurance premiums if plans use mutual funds generating revenue sharing or subtransfer agency (sub-TA) type revenues (i.e., revenue sharing), and 63% said mutual funds using retail share classes would be a significant driver of premiums. As such, monitoring and managing fees, along with documentation, should be a very high priority for plan sponsors.

Investment committee minutes are important (but it matters less who takes them)

All respondents said that formally taking minutes would have an impact on premiums. About one-third of respondents said that the impact would be significant and the remainder said that it would be small. However, when asked about the impact of engaging an outside advisor or legal counsel to take minutes, half the respondents said that would have no impact, and most of the remainder described the impact as small.

Investment advisors are viewed as moderate influencers of premiums

When asked about the impact of having an investment advisor, respondents were almost evenly split among the impact being significant, small or nonexistent. The advisor’s firm had little or no impact. Whether the plan sponsor uses an ERISA 3(38) outsourced investment advisor was viewed as having a small impact by 50% of respondents, no impact by 38% and a significant impact by 12%. Free comments in this area of the survey included “experienced advisor is expected,” “the level of investment expertise deployed in investment decisions is a factor in our underwriting and greater expertise would be a positive factor among the multiple factors we consider” and “we are interested in evaluating the overall favorable impact that a 3(38) may have in this space.”

Employer stock in defined contribution plans remains a top concern for insurers

Eighty-eight percent of respondents viewed employer stock as a significant driver of premiums when company stock is held in the plan with no cap on investment limits. That figure drops to 50% when there is a limit on the size of such investments.

Environmental, social and governance (ESG) options in defined contribution plans play a minor role

Sixty-two percent of respondents said that ESG options have no impact on pricing and the remainder described the impact as small.

The white paper can be viewed at: https://tinyurl.com/2p94c5rx.

For plan sponsor use only, not for use with participants or the general public. This information is not intended as authoritative guidance or tax or legal advice. You should consult with your attorney or tax advisor for guidance on your specific situation.

Kmotion, Inc., 412 Beavercreek Road, Suite 611, Oregon City, OR 97045; www.kmotion.com

©2022 Kmotion, Inc. This newsletter is a publication of Kmotion, Inc., whose role is solely that of publisher. The articles and opinions in this publication are for general information only and are not intended to provide tax or legal advice or recommendations for any particular situation or type of retirement plan. Nothing in this publication should be construed as legal or tax guidance; nor as the sole authority on any regulation, law or ruling as it applies to a specific plan or situation. Plan sponsors should consult the plan’s legal counsel or tax advisor for advice regarding plan-specific issues.