Fiduciary liability insurance protects companies from lawsuits if they makes errors or fails to act in employees’ best interests. For example, if beneficiaries of a 401 (k) plan accuse administrators of charging excessive fees, the insurance pays the company’s legal-defense costs, settlement, and damages. Here’s how.
In the financial world, a fiduciary ideally works solely for the benefit of their client. Therefore, they shouldn’t seek personal gain or sway their clients into particular products in exchange for payment from companies. There are a number of ways businesses expose themselves to risk of a lawsuit claiming breach of fiduciary duty. They include:
- Negligent or poor investment management.
- Charging excessive fees.
- Inadequate diversification of plan assets.
- Having a conflict of interest.
For example, employees sued a large bank for directing 401(k) retirement investments into its own mutual funds. The lawsuit accuses those funds of being overpriced and underperforming.
Fiduciary insurance covers retirement plan-related missteps. It also protects against losses due to errors and mismanagement of other types of employee benefit plans. These may include health insurance, life insurance, profit sharing, disability and employee leave plans.
Businesses may face lawsuits relating to benefit plans for:
- Inadequate communication of health plan terms to covered employees.
- Failure to tell employees about coverage for medical procedures.
- Failing to enroll eligible employees.
- Improperly terminating eligible employees.
For example, a plan administrator might neglect to sign a new hire up for the company health plan. If the employee later had an accident or illness resulting in medical costs, the administrator and company could face a lawsuit for not enrolling an eligible worker.
Who is Protected
Fiduciary insurance protects not only the business and its assets but also individual employees named in potential lawsuits. Any employee whose name or title appears in plan documents can face a lawsuit for breach of fiduciary responsibility.
Plan administrators, directors, officers and trustees all may be liable for damages. Job titles don’t limit liability, however. As a result, anyone with decision-making authority over a plan or its assets may be a fiduciary.
The business and its employees could also may be liable for errors by an outside provider. But a business’s policy won’t protect third-party providers. They will need their own insurance as well.
Fiduciary Liability History
The Employee Retirement Income Security Act (ERISA) of 1974 sets out the obligations for employee pension and benefit plans. Under ERISA, employers and their employees have fiduciary responsibility requirements to administer plan assets and provide benefits to plan members.
Fiduciary responsibility means plan sponsors and plan administration employees have to act in the best interests of employees covered by the plans. Meanwhile, if error, negligence or breach of fiduciary duty prevents a business from doing to, it may be liable for financial damages.
Properly managing assets and administering plans is a complex matter. Even large and sophisticated firms face charges of violating fiduciary responsibility in this area. Notable examples include Wells Fargo and Fidelity.
Fiduciary Liability Insurance Limits
Fiduciary liability insurance typically pays for the costs of defending, settling or paying court-ordered damages. However, it may not cover all costs, since most policies include a deductible.
Policies are typically sold in a bundle of other liability coverages, including directors and officers (D&O), errors and omissions (E&O) and general liability. However, D&O, E&O and general liability policies by themselves will not protect against fiduciary liability losses.
Companies that do not have employee benefits don’t need fiduciary liability insurance. And ERISA does not require businesses that do offer benefits to get fiduciary liability insurance. However, businesses consider acquiring that coverage sound practice. As a result, may investors and lenders may require it.
It’s also worth noting that fiduciary liability insurance won’t cover losses due to intentional wrongdoing or criminal acts such as embezzlement. ERISA bonds, required under the 1974 law, ideally protect plan participants against losses from fraud or dishonesty by plan employees.
The Bottom Line
Fiduciary liability insurance protects companies and their employees against financial losses resulting from lawsuits for mismanaging employee benefit plans. They may help any business offering employee benefits including retirement plans or health insurance plans. Even if your company honestly believes it’s acting in employees’ best interest, it may want this insurance just to ensure that’s the case.
- Finding the right financial advisor to help you with questions about fiduciary liability insurance doesn’t have to be hard. SmartAsset’s free tool matches you with financial advisors in your area in 5 minutes. If you’re ready to be matched with local advisors that will help you achieve your financial goals, get started now.
- Before you trust you retirement plan to your employer and their partners, consider your retirement needs. How much money will you need for retirement? What will your 401(k) be worth when you stop working? What role will Social Security play in your retirement? SmartAsset’s retirement guide can help address some of these questions before you jump onto your employer’s plan.
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