A fiduciary is a person who maintains a legal and ethical relationship of trust. The relationship may be with one other person, or it can be for a group. When it comes to employee benefit plans, an employer has a fiduciary responsibility to act in the best interest of employees with funds in the plan. A mistake in fiduciary responsibility could result in a lawsuit against the employer, or certain directors and officers. This is where fiduciary liability insurance comes into play.
What is fiduciary liability insurance?
Fiduciary liability insurance is a business insurance policy that protects your company from employee claims that the benefits plan was mismanaged. It provides financial protection and legal counsel if your business is deemed to have acted inappropriately as the fiduciary for the retirement plan.
For example, 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 causes wide fluctuations in the pension fund's value as many employees approach retirement. Employers, as fiduciaries, must choose more conservative options that represent employees' risk tolerance.
Thanks to the Employee Retirement Income Security Act of 1974 (ERISA), employers can be held personally responsible for mismanaging employee benefits plans. This is why fiduciary liability insurance is essential.
What is an employee benefits plan?
In today's job market, workers seek employers that offer comprehensive benefits plans. There are two categories of benefits plans to consider: retirement plans and welfare plans. Both are managed and administered by fiduciaries.
Retirement plans include pension plans, 401(k) plans and profit-sharing plans – such as a stock purchase plan. 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?
Many people may be involved in selecting and managing an employee benefits plan. All of these people are fiduciaries, meaning if they had a say in any aspect of the plan's design, investments, or benefits, they are liable in the event of a lawsuit.
Certainly, anyone listed by name in the employee benefit plan document is a fiduciary. This person has direct access to and control over the plan. According to ERISA, anyone with "discretionary authority" is considered a fiduciary. ERISA was created to ensure employees could reap the rewards these plans promise.
If you look at the people involved in managing a retirement plan, you may find that more than just the business and plan administrators are fiduciaries. The plan trustees, directors and officers, and internal investment committees also have fiduciary responsibilities.
Fiduciary insurance and ERISA law
With the onset of fiduciary responsibility, fiduciary liability insurance became necessary because offering benefits plans now carries risk. ERISA doesn't require employers to have plans. However, if they do have plans, they must manage them properly.
The new legal scrutiny created much concern for business owners worried about the myriad things that could go wrong when managing a benefits plan. Even operating with the best intentions could still create a liability. Fiduciary liability insurance is a response to these concerns.
What does a fiduciary liability insurance policy cover?
Fiduciary liability insurance protects the people 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 expert. People can make honest mistakes, and this is what fiduciary liability insurance covers.
| What fiduciary liability insurance covers | What fiduciary liability insurance doesn't cover |
| Plan administration errors | Deliberate fraud |
| Errors in counseling employees | Stealing from the fund |
| Poor or negligent advice on retirement plans | Third parties or outside advisors |
| High-risk investments | |
| Improper changes to benefits | |
| Imprudent selection of third-party service providers | |
| Conflicts of interest | |
| Penalties and fees levied by the Department of Labor and IRS under a voluntary settlement program |
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 puts the onus of prudent actions on employers. It doesn't require employers to have benefits plans, but if the employer chooses 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 high risks and haven't been performing well.
Your business is liable because it's the plan's administrator, and it 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 a 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 important 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?
The cost of a fiduciary liability insurance plan has many factors, such as your company's size and the total plan assets. Most companies can get a fiduciary liability plan for $500 to $2,500 per year, with up to $20 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). The best liability insurance providers bundle policies, allowing you to save money on premiums.
What's the difference between fiduciary liability and employee benefits liability?
Employee benefits liability is an endorsement on a general liability policy to cover the business for administrative errors and omissions regarding benefits. The fiduciary liability policy is a stand-alone policy to meet the ERISA requirements of fiduciary liability and wrongful acts.
Are fiduciaries personally liable?
Fiduciaries are expected to act with reasonable prudence when managing and administering a benefits plan. When they fail to do so, they can be held personally liable for losses to the plan.