What is fiduciary liability insurance?

Learn more about fiduciary liability insurance

When do I need to be aware of fiduciary liability insurance?

Those who are engaged in direct administration, management, or oversight of an employee benefits plans are exposed to fiduciary liability through the requirements of the ERISA law passed in 1974. Claims can arise from errors during enrollment or termination, misinformation or advice given to guide enrollment, or allegations of making risky investments. Small companies with employees without a strong knowledge of ERISA law tend to have greater exposure.

What is important to know about fiduciary liability insurance?

There is a difference between employee benefits liability and fiduciary liability insurance. Fiduciary coverage address mismanagement, imprudent investments, or other decision-making, rather than administrative errors. This policy addresses any benefits administration, whether health insurance, stock options, or retirement contributions. There are some other important items you should know about fiduciary liability insurance:

• Though it provides protection against ERISA-related allegations, the law itself does not require companies or individuals to carry a fiduciary insurance policy.
• Fiduciary liability is the only employer liability coverage that will protect both a company and specific individuals from fiduciary-related claims.
• Fiduciary coverage does not apply when a criminal act has taken place or intentional wrongdoing has occurred, but when applicable, the coverage handles damages handed down through the court, negotiated settlement amounts, legal defense expenses, and investigation costs.

Types of benefit plans covered

Fiduciary liability insurance extends its protection to a wide array of employee benefit plans. These include:

• Defined contribution plans (e.g., 401(k) plans): These plans allow employees to contribute a portion of their salary to individual accounts, with employers often matching contributions.
• Defined benefit plans (e.g., pension plans): These plans promise a specified monthly benefit upon retirement, typically based on salary and years of service.
• Health and welfare plans (e.g., medical, dental, and vision plans): These plans provide various health-related benefits to employees.
• Employee stock ownership plans (ESOPs): These plans give employees ownership interest in the company through stock.
• Multi-employer plans: These plans are maintained by more than one employer and are often found in industries with unionized workforces.
• Governmental plans: These plans are established by government entities for their employees.

By covering such a diverse range of benefit plans, fiduciary liability insurance ensures comprehensive protection for those managing these plans.

Plan sponsor responsibilities

Plan sponsors have a broad range of responsibilities that are crucial to the effective management of employee benefit plans. These responsibilities include:

• Selecting and monitoring plan service providers (e.g., investment managers, administrators): Ensuring that these providers are competent and act in the best interests of the plan participants.
• Ensuring compliance with ERISA and other applicable laws: Adhering to legal requirements to avoid penalties and legal issues.
• Managing plan assets prudently: Making informed and careful decisions regarding the investment and management of plan assets.
• Avoiding conflicts of interest: Ensuring that personal interests do not interfere with fiduciary responsibilities.
• Disclosing plan information to participants and beneficiaries: Providing clear and accurate information about the plan to those it serves.
• Filing required reports with the Department of Labor: Maintaining transparency and compliance through regular reporting.

Fiduciary duty and liability

Fiduciary duty refers to the legal obligation of plan fiduciaries to act in the best interests of plan participants and beneficiaries. This duty encompasses several critical responsibilities, including managing plan assets prudently, diversifying investments, and avoiding conflicts of interest. Failure to fulfill these fiduciary duties can result in personal liability for fiduciaries, including plan sponsors, administrators, and investment managers. Fiduciary liability insurance is an essential safeguard against potential financial repercussions.

Settlor coverage

Settlor coverage is a specific type of protection included in many fiduciary liability policies. It shields plan sponsors from liability for settlor functions, which involve business decisions related to the establishment, amendment, or termination of a plan. While these functions are not considered fiduciary activities under ERISA, claims can still arise alleging breach of fiduciary duty related to these decisions. Settlor coverage ensures that plan sponsors are protected against such claims, providing an additional layer of security within fiduciary liability policies.