In today’s business world, companies and organizations are almost expected to offer their full-time employees benefits such as health care, retirement accounts, or pension plans. Most organizations that do offer these resources will task a group or individual to oversee the benefit plans, and this person or group is called a fiduciary.

Who is a fiduciary?

Fiduciaries can be an individual or organization that exercises authority or control over the management of employee benefit plans. More specifically, fiduciaries are responsible for controlling, investing, or disposing assets held by the plan. A fiduciary can also be any entity that services pension plans such as law firms, accounting firms, consulting firms, investment advisors, etc.

What does a fiduciary do?

A fiduciary is responsible for minimizing expenses, selecting advisors and investments, and following plan documents. It’s a hefty responsibility, one that can lead to major lawsuits if something were to happen involving an employee such as administrative error, denial of benefits, or wrongful termination of a plan.

Because fiduciaries carry such an important responsibility, there is a need for protection for fiduciaries and your assets as a business owner. This is where Fiduciary Liability Insurance comes into play.

What is Fiduciary Liability Insurance?

Fiduciary Liability Insurance is centered around protecting your business and employer assets against claims of mismanagement of your company’s benefit plans.

Under the Employee Retirement Income Security Act (ERISA), fiduciaries are expected to act in the interest of plan participants and may be held personally liable for any mismanagement of employee benefit plans. Fiduciary Liability Insurance offers a layer of protection for your company and employees involved in fiduciary roles.

What does Fiduciary Liability Insurance cover?

Fiduciary Liability Insurance covers legal claims arising from an allegation that a fiduciary has failed his or her duties.

Additionally, it can cover:

• Investigations into the wrongdoing
• Legal defense costs
• Damages awarded by the court when there’s a finding of wrongdoing
• Any settlement award negotiated with those alleging wrongdoing

It can cover costs not just from litigation but also claims resolved in arbitration.

Fiduciary Liability Insurance can also provide policy holders with:

• Affordable coverage. The cost of Fiduciary Liability Insurance can vary depending on your company’s size and assets, but it is generally quite affordable. Most plans range anywhere from $500 to $2,500 per year.
• Coverage beyond fidelity bonds. Under ERISA, fidelity bonds are required and are a means of protecting plans against losses related to acts of fraud or theft. However, these bonds only protect employee benefits and not fiduciary liability. They also do not provide coverage for legal defense costs.
• Specialty protection not found in similar policies. Although many organizations may carry directors and officers (D&O) liability or employee benefits liability (EBL), these policies do not provide protection for fiduciary claims. Complex ERISA violations will not be covered under EBL.

Who is covered by Fiduciary Liability Insurance?

Fiduciary insurance covers any individuals or organizations that administer or control the management of any employee benefit plan. Whether it be health plans, pension plans, profit sharing plans, or more.

It will also cover any board members who make decisions regarding company operations or business expenses, investment advisors, and agents who act on behalf of principals (e.g. employees who have authority to enter into financial transactions on behalf of employers).

Basically, Fiduciary Liability Insurance will cover most executives and administrators of your organization.

However, it does not cover lawsuits that stem from outside of the realm of employee retirement plans. It also does not cover criminal acts or intentional wrongdoing. These things are generally covered through other policies like fidelity bonds that can provide legal coverage if an executive was found to have intentionally embezzled corporate funds.

How does Fiduciary Liability Insurance differ from EBL and Fidelity Bonds?

Under ERISA, fidelity bonds are required. They are designed to safeguard beneficiaries if an administrator were to financially harm an employee benefit plan. However, this bonding insurance only covers the beneficiaries and the plan. It does not protect the trustee (or fiduciary) from liability claims.

EBL insurance covers any claims that arise from errors or omissions while administering a benefit plan. It doesn’t protect against all fiduciary responsibilities, but it may be included in some fiduciary liability policies.

Do I need Fiduciary Liability Insurance?

According to ERISA, Fiduciary Liability Insurance is not required.

However, if you offer a health plan or employee benefits plan to your staff, a fiduciary liability policy is highly recommended. As with most insurance plans, Fiduciary Liability Insurance addresses worst-case scenarios. While you may not foresee a time when your trusted partner swindles your employees out of their benefits, or when the tiniest administrative error causes a plan to be terminated by accident, unfortunately, these things do happen. With Fiduciary Liability Insurance, you can protect you and your company from any unforeseen situations.

Can I limit my liability?

Getting Fiduciary Liability Insurance is a smart choice, but you can do even more to limit your liabilities beyond your policy.

1. Document the processes, decisions, and basis for those decisions carried out by your fiduciary.
2. Offer a profit-sharing or 401(k) plan that gives participants the ability to control their own investments in their accounts.
3. Hire a service provider to handle all fiduciary functions. Make sure the agreement is set up so that service provider assumes liability for those functions and responsibilities selected.

I hired a third-party to manage the 401(k) plan for my company. Am I still a fiduciary?

Yes. According to the Internal Revenue Service, hiring someone to perform fiduciary functions is in itself a fiduciary act. Outsourcing fiduciary responsibilities does not wrest ultimate responsibility away from your business.

Coverage Highlights

Fiduciary Liability Insurance will kick into gear when a plan’s fiduciary breaches any of their duties. It will also offer protection if a fiduciary allows or engages in the following types of transactions between the plan and a party-in-interest:

• The lending of money
• The transferring or use of plan assets for the benefit of the party in interest
• Selling, exchanging, or leasing of property
• The furnishing of goods and services
• The acquiring or holding of employer securities or employer real property in violation of ERISA

Fiduciary Liability Insurance can cover anywhere from $1,000,000 to $10,000,000 in costs and damages. The average premium cost is typically between $500 and $2,500 with a $0 deductible.

There are several factors that will impact your costs:

• Policy limits. As with any insurance policy, the more coverage you want and the lower your deductible, the higher your policy will cost.
• Risks associated with fiduciary obligations. The higher the risk of potential loss, the more expensive your policy will be. For example, a fiduciary who manages a substantial portfolio of retirement investment money for 100 employees will need far more coverage than a fiduciary who manages a small employee profit-sharing plan to a mere handful of employees.
• Your professional reputation and experience. When applying for fiduciary insurance, you will need to provide information from any past claims and fiduciary credentials. The cleaner your record, the cheaper your policy could be.

Additional Fiduciary Liability Insurance Types

Fidelity Bonds

It is required by ERISA to purchase fidelity bonds if you administer an employee benefit plan. Fidelity bonds help ensure full protection from a loss, including any financial damage that occurs due to dishonesty.

Business Owner’s Policy

Most businesses will get a business owner’s policy (BOP) long before they get fiduciary liability insurance. A BOP covers your business if someone sues you because they were injured or hurt on your premises, or if your employees damage someone else’s property. A BOP also comes with property damage provisions that will protect your property from a variety of perils such as fire, theft, and vandalism.

Often times, Fiduciary Liability Insurance can be added on to a Business Owner’s Policy. Most small to medium businesses will already have a BOP in place, so getting Fiduciary Liability Insurance shouldn’t be too hard if you can tack it on to your current policies.

Directors and Officers Insurance

D&O insurance covers reimbursement for any legal costs for claims connected to an officer’s or director’s conduct when managing the business. For example, if a merger goes poorly, D&O will protect the organization or executive from a lawsuit by shareholders who allege the decision to merge was a bad choice.