As a business owner, you wear many hats. You’re a leader, a manager, and often, an expert in a million different things. But did you know that when you manage employee benefits, you’re also a “fiduciary”? This comes with serious legal responsibilities. We’ll show you why fiduciary coverage is a non-negotiable part of protecting both your business and your personal finances.
Read More: Income Protection Insurance vs. Disability Insurance: What’s Right for You?
What Is Fiduciary Liability Insurance?
Fiduciary liability insurance protects people who manage employee benefit plans. This includes employers, trustees, and plan administrators. The insurance shields them and their company from financial losses. This happens if they are sued for mismanaging a plan.
It’s important to know the difference between Fiduciary Liability Insurance and an ERISA bond. An ERISA bond is also called a fidelity bond. It is required by the Employee Retirement Income Security Act (ERISA). This type of insurance protects employee benefit plans, like 401(k)s. It guards them against financial loss. This loss can be due to fraud, theft, or other dishonest acts. The acts must be committed by people who manage the plan. Fiduciary liability insurance is an optional policy. It protects the fiduciaries themselves from claims of negligence. It covers legal defense costs and damages. This is true even if the claims are false.
Common situations covered by this insurance include:
- Poor investment advice: Fiduciaries are accused of making bad investment choices. These choices lead to financial losses for employees.
- Administrative errors: Simple mistakes like incorrect enrollment or , or giving wrong advice to employees about their benefits.
- Failure to diversify investments: A plan’s investments are too focused on one stock. This makes the plan vulnerable to a market downturn.
This type of insurance is a crucial safeguard. Fiduciaries can be held personally responsible for not doing their duty.
Who Counts as a Fiduciary?
Under the Employee Retirement Income Security Act (ERISA), a person or company is a fiduciary. A fiduciary is anyone who has any authority over a company’s employee benefit plan or its money.
Common roles that are fiduciaries include:
- Plan administrators and trustees: They are directly in charge of the plan and its assets.
- Company officers and board members: They have the final say on the plan and its operations.
- Benefits committee members: They make important decisions about the plan’s design and investment choices.
- HR managers and financial officers: They often give advice about the plan. They also manage its daily tasks.
Here is a critical point. You can be held responsible even if you don’t know you are a fiduciary. Just giving advice about a benefit plan can make you a fiduciary by accident. This is why it is so important for businesses and employees to understand this role and its risks.
Why Fiduciary Liability Insurance Matters
Fiduciary liability insurance is a critical safeguard for anyone involved with an employee benefit plan. The main reason it matters is the real risk of lawsuits. This risk is growing. Even a simple mistake can lead to a lawsuit. This includes an administrative error or a bad investment decision. These lawsuits can be very expensive.
Statistics show a consistent increase in lawsuits related to ERISA. For example, there has been a significant rise in class action lawsuits. These lawsuits are about 401(k) plan fees and investment choices. This trend shows the need for protection. The legal and defense costs can be huge. This is true even if the case is dismissed. In one case, a company was sued over high fees in its 401(k) plan. The lawsuit was settled for $14 million. The company also spent over $2 million on defense expenses.
Without this insurance, a single lawsuit could put a company’s finances at risk. It could also put a person’s personal assets at risk. ERISA law says fiduciaries are personally responsible for their actions. This means a person’s personal savings, home, and other assets could be in danger if a lawsuit is successful. Fiduciary liability insurance gives a key layer of protection. It covers legal defense fees and damages.
What Does Fiduciary Liability Insurance Cover?
Fiduciary liability insurance protects against claims of mismanagement. But you need to know what it covers and what it doesn’t. This insurance is made for the specific risks fiduciaries face.
Typical Coverage Areas
- Errors in Plan Administration: This covers many different mistakes. This includes incorrect enrollment of employees. It also covers improper benefit termination and errors in paperwork. These are often simple, unintentional mistakes. They can lead to expensive lawsuits.
- Misrepresentation or Negligence in Investment Options: This covers claims that a fiduciary gave poor investment advice. It also covers claims of choosing risky investments and not offering enough investment choices to plan members.
- Improper Advice or Guidance: A fiduciary might give an employee wrong information about their benefits. This can lead to financial loss. This insurance covers claims that result from such careless advice.
- Breach of Fiduciary Duty: This is the main part of the policy. It covers legal claims which say a person did not act in the best interest of the plan’s members.
The insurance also covers a plan’s legal defense costs. It also covers settlements or court-ordered damages. This is a big benefit. These costs can be huge, even if the fiduciary is not found guilty.
Exclusions
It is just as important to know what is not covered. Most policies have a clear list of things they don’t cover. These typically include:
- Fraud, intentional wrongdoing, or criminal acts: The policy will not cover things done on purpose. This includes embezzlement, theft, or other crimes.
- Bodily injury or property damage: Other types of insurance usually cover this. For example, general liability insurance.
Do You Really Need Fiduciary Liability Insurance?
You might think only large sized companies need fiduciary liability insurance. The truth is, the risks apply to any business that offers a retirement plan, health or dental benefits.
Whether you have a small startup or a large corporation, you have a responsibility. You are a fiduciary to your team.
For small businesses, the risk might seem less obvious. But it can be more dangerous. You often have fewer resources. You also have a smaller legal team. A lawsuit could be about a simple mistake like a bad investment. It could be a poorly chosen investment potentially devastating. A single mistake could lead to a lawsuit. That lawsuit could ruin your company’s finances.
For medium and large employers, the risk is even greater. This is because their plans are bigger. They also have more participating people. The more people in a plan, the higher the chance of a claim. There has been a recent rise in class action lawsuits. These are often about 401(k) fees. This shows that no company is too big to be sued.
The decision to get this insurance comes down to a simple cost-benefit analysis. A lawsuit can cost millions in legal fees and damages. It can also cause emotional stress. It can lead to the loss of personal assets. This loss is huge as compared to the small annual premium for a fiduciary liability policy. So, it is a vital and affordable way to protect your business and yourself.
Much Does Fiduciary Liability Insurance Cost?
The cost of fiduciary liability insurance is not the same for everyone. Each company has a different level of risk. The premium is generally decided by a few key factors:
- Company Size: Larger companies will pay more. They have more employees. They also have a higher number of people in their plans. A larger workforce means a higher chance of a lawsuit.
- Type of Benefits Offered: The kind of benefit plan you have also changes the price. A simple 401(k) plan might be cheaper to insure. A complex mix of health, dental, and retirement benefits could be more expensive.
- Total Plan Assets: The total value of your plan’s assets is a big factor. If the assets are higher, the potential loss in a lawsuit is greater. This will make your premium higher.
For a small business, a policy might cost from $600 to $2,500 each year. Larger companies can pay tens of thousands of dollars a year. This amount might seem too much. But it is a very small part of the potential cost of a lawsuit. A single claim can result in millions of dollars in legal fees and damages. The premium is a small price to pay for this important protection.
How to Get Fiduciary Liability Insurance
Getting fiduciary liability insurance is a simple process. But you must plan carefully to get the right coverage. Here is a simple guide on how to get a policy.
Evaluate Company’s Benefit Plans
First, evaluate your company’s benefit plans. Look at all the plans you offer. This includes retirement, health, life, and dental. Understand how many employees are in them. Also, find the total value of the plan assets. This information is key for any insurer. It helps them assess your risk. It also helps them give you an accurate quote.
Consult a Broker Experienced in Fiduciary Insurance
Next, the most important step is to consult a broker experienced in fiduciary insurance. Find one who works with management liability insurance. Fiduciary liability is a complex area. An experienced broker can help you understand your risks. They can also guide you to the best policy. They can compare offers from different insurers. This will help you find the best prices and coverage for your needs.
Bundling with Other Coverages (D&O, EPLI)
When you are ready to buy, think about bundling the insurance with other coverages. This is often an efficient and cheap strategy. Many insurers offer a “management liability” package. It includes Fiduciary Liability, Directors & Officers (D&O) liability, and Employment Practices Liability (EPLI). This approach can make your coverage simpler. It can also reduce paperwork. It might even lower your total premium.
FAQs about Fiduciary Liability Insurance
Is fiduciary liability insurance required by law?
No, fiduciary liability insurance is not required by law. The Employee Retirement Income Security Act (ERISA) does not require it. However, ERISA law does hold fiduciaries personally responsible. This insurance is an option. It is a highly recommended safeguard. It protects a company and key people from expensive lawsuits. It also protects them from potential financial ruin.
What’s the difference between fiduciary liability insurance and an ERISA bond?
An ERISA bond is mandatory. It protects the plan’s money from fraud or theft. Fiduciary liability insurance is optional. It protects the fiduciaries and the company itself. It covers legal claims of mismanagement or negligence. The two cover different risks. You should consider both for full protection.
Who needs fiduciary liability insurance the most?
Any employer who offers a benefit plan has a fiduciary responsibility. This includes offering retirement plans like a 401(k). It also includes offering health benefits. Large companies face a high risk. Small businesses are also very vulnerable. A single lawsuit could be financially devastating for them.
Does D&O insurance cover fiduciary liability?
D&O insurance generally does not cover fiduciary liability claims. D&O covers management decisions for the whole company. A separate fiduciary liability policy is needed. It protects against claims specifically about managing employee benefit plans.
What is the future of digital insurance providers in the U.S.?
The future is digital. We can expect to see more use of AI. We can also expect more data analytics. This will lead to more personalized policies. It will also lead to faster claims. The focus will be on making the customer experience smooth and easy to use.
