Fiduciary Liability Insurance

What is Fiduciary Liability Insurance?

Fiduciary liability insurance is for businesses that offer retirement plans and/or welfare benefits to their employees. It protects not just the business itself but also its individual fiduciaries. The term fiduciaries refers to the people responsible for administering its 401(k) plans or for advising employees about their health care packages, paid leave entitlement, and other benefits). 

Under federal law, fiduciaries can be sued personally for mismanaging these plans —even if they do so in genuine error. Fiduciary liability insurance covers the legal costs incurred when a business has to defend itself and its fiduciaries in court against employee benefits claims. 

Many fiduciaries in small- to medium-sized businesses aren’t aware of their legal responsibilities. Their obligations include acting in the best interests of a plan’s participants (the employees who sign up for it) and avoiding any conflicts of interest. 

Failure to follow the code of conduct for fiduciaries as laid out in the Employment Retirement Income Security Act of 1974 (ERISA—more about that below) can be a costly mistake. According to the U.S. Department of Labor, “Fiduciaries who do not follow these principles of conduct may be personally liable to restore any losses to the plan, or to restore any profits made through improper use of plan assets. Courts may take whatever action is appropriate against fiduciaries who breach their duties under ERISA including their removal.” 

Regardless of the size of your business, if you offer any sponsored retirement plans and/or benefits to your employees, you need fiduciary coverage. Under federal law, you and the people you put in charge of managing these plans are considered fiduciaries, so you can each be held personally liable for violations of fiduciary responsibility. If you’re uninsured, you’ll be financially vulnerable should an employee allege that you mishandled contributions, gave bad advice, or otherwise mismanaged the plan. In the event that you or your company face these allegations, fiduciary liability insurance helps to cover the costs of your legal defense against these types of allegations.

It’s important to note that employees can sue your business for honest mistakes. As a fiduciary, you don’t have to do anything wrong deliberately to be sued for an alleged ERISA violation. Even a simple error can land you in court. Furthermore, employee benefits plans are complicated, and it’s easy to make a mistake. If your business has a department or a person responsible for managing plans such as those outlined below, you could face a lawsuit for losses that occur. Relevant plan types include:

• 401(k)s and 403(b)s
• Medical coverage
• Dental coverage
• Paid leave
• Life insurance
• Educational assistance programs

A mistake could be anything from not providing full information about plans in a timely manner to investing pensions poorly or not letting employees know they’re eligible for certain types of medical coverage.

What Does Fiduciary Liability Insurance Cover?

A fiduciary liability policy covers an employer’s costs when an employee takes them to court, alleging that they’ve suffered losses because of a fiduciary’s wrongdoing. Coverage usually includes legal defense for the employer and their individual fiduciaries, expenses for investigations, any damages awarded, and financial settlements between employer and employee.

Some of the most common claims involve allegations that a fiduciary:

• Made administrative mistakes with a plan
• Misused money paid into a plan by employees
• Delayed transferring employee contributions
• Denied an employee benefits to which they were entitled
• Wrongly changed or reduced an employee’s benefits
• Gave incorrect advice about a plan
• Had a conflict of interest regarding a plan
• Made prohibited transactions
• Failed to invest plan assets wisely
• Failed to diversify plan investments
• Chose to work with an unsuitable third-party service provider
• Didn’t adequately monitor a third-party service provider
• Didn’t provide automatic coverage for a new plan

Counterpart’s fiduciary liability coverage provides everything fiduciaries traditionally need plus some innovations for the modern small business facing contemporary risks. Examples of scenarios that are generally covered include:

• HIPAA fines and penalties coverage
  The Health Insurance Portability and Accountability Act of 1996 is a federal law that protects a patient's health-related information. You and/or your fiduciaries could face fines and penalties if you disclose this type of data about an employee without their knowledge or consent. Policies may cover alleged or actual HIPAA violations as a matter of course. HIPAA coverage may become even more important for small businesses as they contend with the issue of employees’ COVID-19 vaccination status.
  
• Voluntary compliance losses coverage
  The steps you take as a fiduciary to comply with ERISA requirements often have associated costs, especially if you have to put right a violation of the law. Our basic policy covers any fines, penalties, sanctions, or fees you may have to pay to a governmental authority in relation to this type of voluntary compliance. 
  
• Settlor coverage with full limits
  If you or any of your fiduciaries are found personally liable in an employee benefits lawsuit, you’re covered right up to the full limit of the policy. This provides everyone with extra peace of mind, knowing that their personal finances are protected.

Of course, you should review your policy with your broker to verify which of these coverages are included and to ensure that it meets the needs of your business.

What Does Fiduciary Liability Insurance Not Cover?

Fiduciary liability insurance does not cover an employer or fiduciary for intentional wrongdoing. Things such as fraud, theft, embezzlement, or any other criminal acts fall outside the scope of coverage. 

Additionally, a business’s own policy doesn’t usually cover any outside advisors or administrators it hires to manage plans. Some small businesses outsource the management of their employee retirement and benefits plans to a professional fiduciary service or consultant. This is often a sensible move, but it’s important to remember that it doesn’t take away your own fiduciary responsibility. Even when professional fiduciary services are used, your company still has the responsibility to oversee that your plan is administered properly. A fiduciary liability policy you hold is unlikely to cover you or your third-party fiduciary service provider in the event that the third-party service provider mismanages the plan.  Just as small businesses need their own fiduciary protection, so do third-party fiduciary service providers.

Moreover, failing to fund a plan in compliance with ERISA is a violation of federal law, so fiduciary liability insurance policies don’t cover the failure to fund in their fiduciary insurance policies.

What is the Cost of a Fiduciary Liability Lawsuit?

Fiduciary liability insurance is needed to protect employers from employee benefits claims, and that need is becoming more urgent. Fiduciary claims have increased in recent years, increasing the urgency for business owners to consider insurance coverage. Relatedly, claims for denied benefits (such as paid time off) have shot up during the COVID-19 pandemic, with many proving very costly, especially for smaller businesses.

Furthermore, in an ERISA lawsuit, you as the employer or plan sponsor have to prove you’ve complied with the law. It’s not down to the employee or plaintiff to prove that you haven’t. Given the high cost of legal fees in any dispute, it’s not hard to see how expenses can quickly mount up. Lockton, a brokerage, estimates that the average defense cost for a fiduciary claim in 2018 was $125,000.

In 2019, the total amount agreed in employee benefits settlements came to $449 million, according to Bloomberg Law, a big increase on 2018 levels. Bloomberg also described 2020’s trend for lawsuits related to 401(k) fees as turning from a “steady stream” to a “flood.” Employee benefits claim expenses like this—especially if the employee wins in court or a settlement is reached—could bankrupt a small business, leaving its fiduciaries to defend themselves. It could also devastate the fiduciaries’ personal finances.

How Much Does Fiduciary Liability Insurance Cost?

Fiduciary insurance premiums have gone up in recent years because of a spike in 401(k) claims. They can range from a few hundred to a couple of thousand dollars per year, depending on a business’s specific needs. Most small businesses with fewer than 100 employees will pay less than $1,500 per year.

Factors that insurers consider when calculating premiums include:

• The type of business
• The extent of coverage a company wants or needs
• The number of employees expected to sign up for the plan
• Whether the company has a history of fiduciary policy claims
• The company’s assets
• The total funds being managed under retirement or benefit plans

Premiums are always more affordable than going to court uninsured. Most companies buy fiduciary liability insurance alongside over management liability coverage products, including directors and officers policies and EPLI policies.

Fiduciary Liability Insurance: Frequently Asked Questions

1) Who is a fiduciary?

Under federal law, a fiduciary is anyone associated with a business who has any decision-making power over the retirement plans and welfare benefits that the business offers its employees. This includes anyone with control over the assets or funds invested in those plans, who gives advice to employees about them, or is simply named in a plan document.

Fiduciaries can be:

• Business owners or employers
• A company’s directors and officers
• Employees (for example, on a human resources team)
• Members of a plan’s investment committee
• Trustees

If they carry out the activities of a fiduciary through their work, any of the people listed above (and indeed anyone at all) can be held personally liable for mismanaging:

• Benefit contribution plans
• Defined contribution plans
• 401(k)s
• Profit-sharing plans
• Health maintenance organization plans (HMOs)
• Flexible spending accounts (FSAs)
• Disability and life insurance packages
• Paid leave arrangements
• Employee stock option plans (ESOP)

It’s the work someone does in overseeing retirement and benefits plans that determines whether they are a fiduciary, even if their everyday job title relates to something else. It’s not uncommon for small businesses to have people doing a variety of different jobs all acting as their fiduciaries, or it could be just one person in the back office—no matter what, they all need fiduciary protection.

2) What is ERISA?

The Employment Retirement Income Security Act (ERISA) is a federal law that protects workers’ retirement plans and employee benefits, making sure they receive what’s promised to them. Under this law, businesses don’t have to offer benefits to their employees. But if your business does, you and your fiduciaries must meet certain standards for managing the plans and the money your employees invest.

ERISA allows plan-participating employees to sue you as the employer and your fiduciaries if they don’t get the benefits to which they’re entitled. They can file lawsuits for “breaches of fiduciary duty.” Under ERISA, your fiduciary duties include:

• Following ERISA’s regulations to ensure plan funds aren’t misused
• Adhering to minimum standards as to how plan participants accrue their benefits
• Complying with ERISA regarding which employees are eligible and how you should handle their contributions
• Providing your employees with information on a regular basis about a plan’s features and funding

As a fiduciary, you have to provide some of this information only when an employee asks for it, but you’re obliged to provide certain other documents automatically, as described by the Department of Labor:

“One of the most important documents participants are entitled to receive automatically ... is a summary of the plan, called the summary plan description or SPD. The plan administrator is legally obligated to provide to participants, free of charge, the SPD. The summary plan description is an important document that tells participants what the plan provides and how it operates. It provides information on when an employee can begin to participate in the plan, how service and benefits are calculated, when benefits become vested, when and in what form benefits are paid, and how to file a claim for benefits.”

Forgetting to provide this documentation could be an ERISA violation.

3) Do I need fiduciary liability insurance if my business already has EPLI?

Yes. A fiduciary liability policy has a very specific purpose as discretionary control insurance for anyone who oversees your business’s employer-sponsored pension plans or welfare benefits. Under federal law, all these people are your fiduciaries. If an employee sues your company for alleged breaches of fiduciary duty regarding their 401(k) or for denial of paid leave, fiduciary liability insurance gives your fiduciaries and you as the employer the exact financial protection you need. 

Without targeted fiduciary protection, it’s doubtful that your company has the protection it should. Insurance policies covering employment practices liability, directors and officers, employment benefits liability, or errors and omissions don’t fully cover fiduciary liability.

4) Am I legally required to have fiduciary liability insurance for my business?

No. There’s no legal obligation under ERISA for your business to have fiduciary liability insurance. But if you offer sponsored pension plans or benefits such as health care and dental coverage to your employees, then you’re legally liable if those plans aren’t properly managed. Some of your staff could be personally liable, too. All employers should have solid fiduciary liability coverage in place, particularly with expensive employee benefits lawsuits on the rise.

4) What is a breach of fiduciary duty?

Fiduciary duties or responsibilities are defined by the Employment Retirement Income Security Act of 1974. It says that fiduciaries must “run the plan solely in the interest of participants and beneficiaries and for the exclusive purpose of providing benefits and paying plan expenses.” Also, they have to “act prudently and must diversify the plan’s investments to minimize the risk of large losses. In addition, they must follow the terms of plan documents to the extent that the plan terms are consistent with ERISA. They also must avoid conflicts of interest.”

Breaches of these duties include:

• Providing erroneous advice on investing in retirement plans
• Charging excessive fees
• Not ensuring enough diversification of a plan’s investments
• Not communicating health and welfare plan eligibility or entitlements to employees, resulting in lost benefits
• Administrative errors or omissions that result in lost benefits

Final Thoughts

Businesses are coming out of the COVID-19 pandemic into a world where employees are increasingly ready to take disputes to court. Having fiduciary liability coverage that’s designed for this 21st-century reality and trusted by leading brokers is more important than ever. 

Speak to an employment insurance expert or review more details about fiduciary liability insurance from Counterpart to learn more.