What Is Fiduciary Liability Insurance?

Fiduciary liability insurance protects businesses from mismanagement claims. Learn how it works and if you need it.

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When dealing with employee benefit plans and plan funds, employers have a fiduciary responsibility to act in their employees’ best interests. This means they’re legally bound to act ethically and do right by their teams. A mistake in fiduciary responsibility could result in a lawsuit against the employer or some directors and officers. Because of this risk, many businesses obtain fiduciary liability insurance. We’ll explain how fiduciary liability insurance works to help employers decide if they need this protection.

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.

If you're looking for employee retirement plans designed for your small business, check out our reviews of the best employee retirement plans to compare costs, features and flexibility.

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.

When offering employee benefits, consider going beyond FMLA-mandated leave to offer extended parental leave, flextime, unlimited PTO, mental health services and more to attract top talent.

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:

Fiduciary liability claims covered

Fiduciary liability claims not covered

Plan administration errors

Errors in counseling employees

Stealing from the fund

Poor or negligent advice on retirement plans

Third parties or outside advisors

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

Conducting a criminal background check on prospective employees can help prevent specific types of fraud, such as employee accounting fraud and employee theft

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.

Setting specific policies can limit your liability. For example, while you may want to help employees make good retirement investment choices, make it a rule not to offer any investment advice on retirement accounts.

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.

Implementing a compressed work schedule, generous paid leave, and professional development opportunities can make your workplace more attractive to promising job candidates.

Fiduciary liability insurance FAQ

What's the difference between fiduciary liability and employee benefits liability?

Employee benefits liability is an insurance endorsement on a general liability policy that covers the business for administrative errors and omissions regarding benefits. In contrast, a fiduciary liability policy is a stand-alone policy designed to protect a business if it is found to fall short of ERISA's liability mandates.

Are fiduciaries personally liable?

Yes. 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 plan losses.

What are the exclusions of fiduciary liability insurance?

Fiduciary liability insurance does not pay out when there's been deliberate fraud related to or theft from an employee benefits plan. It also does not cover the actions of third parties, like a program manager hired by the company to administer the plan.

Is fiduciary liability insurance legally required?

No. If you offer an employee benefits plan unrelated to the wages you pay your staff, you're not legally required to have a fiduciary liability insurance policy. However, you are required to have an ERISA bond that covers at least 10 percent of the plan assets' value.

What kinds of companies should get fiduciary liability insurance?

Any company that provides employee benefits plans with 401(k) and 403(b) retirement plans, stock option plans, and health insurance plans should consider fiduciary liability insurance. These policies protect companies against claims of plan mismanagement.

Mark Fairlie contributed to this article.