The loss of employee personal information due to a cyber breach is an ever-increasing concern to all employers. After years of work to put into place protocols to comply with HIPAA’s requirements on protected health information, plan sponsors’ and service providers’ focus now is broadening to include protection of employee information maintained in connection with other types of benefit plans, including retirement plans. Retirement plan data — name, date of birth, address, Social Security number, compensation and other financial information — typically is maintained by the plan sponsor and provided to a plan record keeper and other plan service providers, and usually is sufficient to steal an employee’s identity.
The cost of a cybersecurity breach, including detecting the extent of the breach, recovering data and restoring systems integrity, can be substantial. In addition, a breach may trigger enforcement actions by governmental agencies, resulting in penalties arising under state or federal law, and potentially exposing the employer or plan service provider to civil claims under common law or various state statutes.
While there is no comprehensive federal regulatory scheme governing cybersecurity for retirement plans and their service providers, many state laws, including North Carolina law, include breach notification and private rights of action for the unauthorized disclosure of protected personal information, and state attorney generals have been active in enforcing these laws in cyber breach cases. In addition, existing guidance under ERISA already recognizes the risks associated with the electronic communication of plan information. Under DOL Regulation Section 2520.104b-1(c) (addressing the electronic distribution of plan information to participants) and DOL Technical Release No. 2011-03 (dealing with a secure continuously available website used to communicate information about participant-directed investment alternatives under a retirement plan), a plan sponsor has an obligation to ensure the electronic system used protects the confidentiality of personal information relating to the individual’s accounts and benefits.
Whether cybersecurity is an ERISA fiduciary responsibility and whether ERISA preempts state cybersecurity laws remain important unanswered questions. A report on cybersecurity recently released by the DOL’s ERISA Advisory Council provides extensive information to plan sponsors, fiduciaries and plan service providers on approaches for managing cybersecurity risks, but highlights the need for additional clarification on the extent of plan sponsor and vendor responsibilities to protect participant information. However, the report includes the recommendation that plan sponsors and fiduciaries consider cybersecurity in safeguarding benefit plan data and assets and when making decisions to select or retain a plan service provider. The Council, an influential body that advises DOL on issues under ERISA, has been studying benefit plan cybersecurity issues since 2011. While the report’s recommendations do not have the force of law or regulation, in light of the broad scope of an ERISA fiduciary’s obligation to act with prudence and the resources the Council has directed at this issue, this report may represent the foundation for future regulatory or statutory efforts addressing plan sponsor and vendor fiduciary responsibility for cybersecurity matters. In addition, it could cited as a baseline standard-of-care in future tort actions by private plaintiffs.
What should retirement plan sponsors and fiduciaries be doing now to address cybersecurity risks? Develop, implement and maintain a retirement plan cybersecurity risk management strategy. The critical components of such a strategy may be divided into three broad categories: (1) development and maintenance of the strategy, (2) management of third-party risks, and (3) evaluation of enterprise and plan-specific insurance coverages and consideration of whether specialized cybersecurity insurance should play a role in the strategy.
1. Development and maintenance of a cybersecurity risk management strategy.
2. Third-Party Risk Management.
3. The role of insurance.
Traditional liability, errors and omissions, directors and officers, ERISA bonds and fiduciary coverages may not cover, or provide only limited coverage, for a cybersecurity breach. Evaluate existing coverage in light of a plan for cybersecurity risk assessment and determine whether cybersecurity insurance will operate efficiently to address gaps in other coverages. Cybersecurity insurance is still an evolving segment of the insurance industry, and policies should be carefully reviewed to determine the type and scope of coverage, policy and individual incident limits, and other important terms and limitations of the coverage.
Eliminating all risk of cyber attacks is not a realistic goal, so plan sponsors and fiduciaries instead should focus on developing a reasonable and proportionate response to the risk of a cybersecurity breach of plan data. While the question remains whether the responsibility to address cybersecurity risks is a fiduciary duty under ERISA, the loss of employee personal information due to a breach nevertheless could result in serious costs and other consequences, including possible third-party liability, fines, notifications and required remediation under state and other federal laws. Additionally, a breach of employee data is almost certain to leave losses of productivity and lowered workplace morale in its wake. Therefore, prudent plan sponsors and fiduciaries should develop a cybersecurity risk management strategy specific to and appropriate for their benefit plans, leveraging where possible existing cybersecurity efforts in the sponsor’s core business.
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