The responsibility of trustees, employers, fiduciaries, professional
administrators, and the plan itself with respect to errors and
omissions (E&O) in the administration of employee benefit programs
as imposed by the Employee Retirement Income Security Act (ERISA).
Fiduciary liability insurance protects businesses’ and employers’ assets against fiduciary-related claims of mismanagement of a company’s Employment Retirement Income Security Act (ERISA) and benefit plans. The insurance is not required by ERISA or any federal statute. If a claim is made against the policyholder, it covers the legal expenses incurred in defending against the allegations, arising from the financial losses the plan may have incurred due to errors, omissions or breach of fiduciary duty.
Under ERISA, fiduciaries may be held personally responsible for the mismanagement of employee benefit plans.
Under ERISA Section 409, both employers (the plan sponsors) and outside providers hired in a fiduciary capacity are potentially exposed to significant liabilities. If a plan is not managed properly and/or benefits are lost because employees were not given adequate information or instruction, fiduciaries can be held “personally liable” to “make good” any losses that are due. The ramifications are broad, from legal claims arising from poorly invested pensions, to charges of failing to inform employees about their eligibility for coverage for medical procedures or other welfare benefits.
Keep in mind that even if outside advisors are hired to take on the plans’ fiduciary functions, this does not exclude the plan trustees from liability—plan trustees are responsible for monitoring these activities.
Fiduciaries are defined by their roles
In describing the scope of what qualifies a person as a fiduciary, in “Meeting Your Fiduciary Responsibilities” (February 2012), the Employee Benefit Security Administration writes:
Many of the actions involved in operating a plan make the person or entity performing them a fiduciary. Using discretion in administering and managing a plan or controlling the plan’s assets makes that person a fiduciary to the extent of that discretion or control. Thus, fiduciary status is based on the functions performed for the plan, not just a person’s title.
In other words, ERISA focuses on what people do with regard to a plan, not what their job title may be. ERISA demands accountability from anyone who has discretionary authority or control over a plan’s management or assets.
The “breach of fiduciary duty” and other errors or omissions that are covered by a fiduciary liability policy will typically include:
- Providing advice on investing employees’ retirement plans like 401(k)s, poor or negligent investment practices, including failure to offer adequate diversification options, charging excessive fees, or acting in a way that presents a conflict of interest
- In administering health and other welfare plans, inadequate policy communications or errors in counseling or providing interpretations to employees that result in lost benefits
- Errors in computing or administering plans, such as improper enrollment or terminations, that result in lost benefits
Fiduciary Liability Policies and ERISA Fidelity Bonds Serve Quite Different Functions
Fiduciary liability insurance does not cover acts of theft—and does not satisfy ERISA bonding requirements.
If someone acting as a fiduciary deliberately defrauds or steals from a plan, that kind of act would be covered under a fidelity bond. Although allegations of negligence, poor oversight and other breaches of fiduciary responsibility are technically “illegal” under ERISA, they aren’t deliberately fraudulent.
More to the point, fiduciary liability policies protect fiduciaries’ liability, in terms of paying for their legal defense and restoring whatever damages they may be responsible. ERISA fidelity bonds are required to protect the employees’ benefits, as represented by the employee plans.
Even if your business carries other liability policies to protect your company against legal claims, coverage for fiduciary liability is likely not included—or adequate. For example, most directors and officers (D&O) policies specifically exclude coverage of fiduciary liability claims. A different type of insurance policy, called employee benefits liability insurance, provides coverage for employee-plan claims, but is limited to administrative errors.
“Please see polic(ies) and endorsement(s) for exact terms, conditions and exclusions. Each insurance company has its own policy language. We encourage you to seek legal advice prior to securing any insurance."
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