What Is Fiduciary Liability Insurance?

What is fiduciary liability insurance?

Fiduciary liability insurance, sometimes called management liability insurance, is a business insurance policy that protects your company from employee claims of benefit plan fund mismanagement. This policy provides financial protection and legal counsel if your business is deemed to have acted inappropriately as the retirement plan’s fiduciary.  

For example, let’s say a company has an employee pension plan and invests that money in high-risk funds to grow the plan aggressively for the employees’ benefit. Unfortunately, this decision causes wide fluctuations in the pension fund’s value as many employees approach retirement. Under their fiduciary duty, employers must choose more conservative options representing employees’ risk tolerance. 

Thanks to the Employee Retirement Income Security Act of 1974 (ERISA), employers can be held responsible for mismanaging employee benefits plans. This is why fiduciary liability insurance is essential. 

What is an employee benefits plan?

An employee benefits plan is part of an employee’s compensation package that includes specific perks and benefits. In today’s job market, workers seek employers that offer comprehensive benefits plans. 

Employers typically consider retirement plans and welfare plans when deciding which employee benefits to offer. Both types of plans are managed and administered by fiduciaries.

• Retirement plans: Retirement plans include 7702 plans, pension plans, 401(k) plans and profit-sharing plans, such as a stock purchase plan. 
• Welfare plans: Welfare plans keep employees healthy or provide for their families if they die. Welfare plans include medical benefits, dental benefits, and life and disability insurance programs. 

What is a fiduciary?

A fiduciary is someone who acts on behalf of another person or group and is legally and ethically bound to act in their best interests. When it comes to retirement plans, many people may be considered fiduciaries and are liable in the event of a lawsuit. According to ERISA — which was created to ensure employees could reap the rewards these plans promise — anyone with “discretionary authority” is considered a fiduciary. 

Employee benefit plan fiduciaries may include the following: 

• People involved in selecting and managing the employee benefits plan
• Any plan trustees, directors and officers
• Anyone involved in internal investment committees
• Anyone with a say in any aspect of the plan’s design, investments or benefits
• Anyone listed by name in the employee benefit plan document 
• Anyone with direct access to and control over the plan

How does ERISA affect fiduciary liability insurance?

ERISA doesn’t require employers to have employee benefits plans. However, the law requires employers to manage their plans properly if they have them. When ERISA was enacted, fiduciary responsibility came under scrutiny. Therefore, fiduciary liability insurance became necessary because offering benefits plans now carries risk.  

Employers seek out fiduciary liability insurance because much can go wrong when managing a benefits plan. No matter how well intentioned the people running a benefit plan are, their actions can still give rise to a fiduciary liability claim. Fiduciary liability policies were created in response to these concerns. 

What does a fiduciary liability insurance policy cover?

Fiduciary liability coverage protects those who advise on the plan’s selection or help employees enroll. It does not protect third-party advisors or managers; these individuals should have their own insurance policies. 

The policy covers innocent and negligent mistakes. Remember that your directors and officers may not be plan experts and your plan administrator is not an investment specialist. People can make honest mistakes, and this is what fiduciary liability insurance covers. 

Here’s an overview of claims covered by fiduciary liability insurance:

Who needs a fiduciary policy?

Any business that offers an employee benefits plan should have fiduciary liability insurance, along with other insurance policies. ERISA mandates that employers take responsibility for plan administration and take prudent actions. It doesn’t require employers to have benefits plans, but if they choose to offer one, they are responsible for the actions related to it. 

The fiduciary insurance policy doesn’t take away liability; it provides protection by paying the legal fees, potential settlements or judgments associated with a benefits plan management error. 

For example, assume your company has had a benefits plan for several years on which directors and officers voted. You hired a third party to administer the plan. However, this third party has a history of making high-risk investments for the plan. When looking at their retirement options, an employee sees that the funds are risky and haven’t performed well. 

Your business is liable because an owner or employee is the plan’s administrator and they selected the third party. Your company has a fiduciary responsibility to find a reputable third-party administrator who acts with prudence on employees’ behalf. When the lawyer serves your business with the lawsuit, you’ll file an insurance claim with your fiduciary liability insurance carrier. The insurance carrier will hire an attorney to defend you and pay a settlement if needed. 

It’s essential to recognize that honest mistakes happen and things can go wrong with so many moving parts in an employee benefits plan. This is why insurance is so important. 

What does fiduciary liability insurance cost?

Fiduciary liability insurance costs vary by company size, plan assets and more. Most companies can get a fiduciary liability plan for $500 to $2,500 per year, with up to $10 million in coverage. 

When considering fiduciary liability insurance, ask your insurance agent about bundling it with directors and officers insurance (D&O) or employment practices liability insurance (EPLI). Bundled policies help you to save money on premiums. 

Mark Fairlie contributed to this article.