Fiduciary liability

If your business offers a 401(k), pension or health plan, the people who run it carry legal duties to the plan and its participants. A fiduciary under ERISA can be personally liable to restore plan losses caused by a breach and to give back profits made through improper use of plan assets, under 29 U.S.C. § 1109 (opens in a new tab). Fiduciary liability insurance is the policy that responds to claims of that kind, such as imprudent administration or failing to follow plan documents, within its limit, retention and claims-made terms. Fiduciary status depends on what a person does and the authority they hold, not their job title, according to the Department of Labor's ERISA Fiduciary Advisor (opens in a new tab).

How fiduciary insurance and the ERISA bond each pay

The ERISA bond and fiduciary liability insurance protect against different losses. The ERISA fidelity bond covers fraud or dishonesty by people who handle plan money. Each covered plan official must be bonded for at least 10% of the funds handled, with a $1,000 minimum per plan, according to DOL Field Assistance Bulletin 2008-04 (opens in a new tab). Fiduciary liability insurance covers breaches of fiduciary duty instead. Using illustrative figures:

Neither protection pays past its limit. On the fiduciary policy, defense costs and the retention can shrink the payment further, and exclusions may remove part of the claim. The $120,000 losses are illustrations, not industry averages.

Limits, retentions and the claims-made terms that matter

There is no national standard limit or premium for fiduciary liability insurance. Premium depends on the insurer's underwriting, plan assets, the number and type of plans, claims history, fiduciary controls, limits, retentions and policy wording. Fiduciary liability forms commonly set out these terms:

• Limit. The most the policy pays, sometimes shared with other management liability coverage.
• Retention. The amount the insured pays before the policy responds. Some forms add a separate retention when the organization cannot indemnify an individual fiduciary.
• Defense costs. Some forms reduce the limit by legal defense costs, leaving less for a settlement or judgment.
• Claims-made trigger. The policy generally responds only to a claim first made during the policy period or an extended reporting period.
• Retroactive or continuity date. Acts before this date may be excluded.
• Extended reporting period. Extra time to report claims, usually for an additional premium.
• Duty to defend. The declarations may show whether the insurer defends the claim or reimburses defense costs.

When the plan itself pays for the policy, ERISA requires the policy to let the insurer seek recourse against a fiduciary who breached a duty, under 29 U.S.C. § 1110 (opens in a new tab).

Where the term comes up

Fiduciary liability is a commercial insurance term. It applies to employer-sponsored retirement plans, health and welfare plans, pension, profit-sharing and 401(k) plans, and the people around them: trustees, plan administrators, investment committees, employers, directors, officers and outside fiduciary service providers. It is often sold within a management or professional liability insurance package, and it is not a coverage on personal auto, homeowners, renters, condo, life, pet or ordinary individual health policies.

A business meets it on a quote, application, binder, declarations page, renewal proposal, endorsement or claim letter. The application may ask about ERISA violations, known circumstances, plan assets, prior claims and the number and type of benefit plans. A general liability insurance policy is a different coverage, so confirm in the actual policy and endorsements whether fiduciary claims are covered.

Questions to ask your agent or insurer

An agent or broker can walk through these with you; the guide to insurance brokers vs agents explains the two roles.

1. Does the policy cover the plan, the employer, individual fiduciaries, outside administrators, or all of them? Liability can attach to fiduciaries personally, and the policy's insured definitions decide who gets defense and payment.
2. Is the policy claims-made, and what are the retroactive date, continuity date and reporting deadline? Coverage can depend on when a claim is made and reported, not only when the breach happened.
3. Do defense costs reduce the limit, and is the limit shared with other coverage? Legal costs can cut what remains for a settlement or judgment.
4. What retention applies, and does the policy include an ERISA recourse provision? You may pay the retention, and a plan-paid policy must allow recourse against a fiduciary who breached a duty.
5. Is the plan separately covered by an ERISA fidelity bond in the required amount? The bond and the fiduciary policy protect against different losses.

Frequently asked questions

Short answers for plan sponsors and fiduciaries.

Is fiduciary liability insurance required by ERISA?

Generally, no. ERISA section 410 permits a plan or employer to buy insurance for fiduciaries or the plan, while section 412 separately requires a bond for covered people who handle plan funds or property. The bond is the protection ERISA generally requires.

Does a small business with a 401(k) plan need this coverage?

A 401(k) plan creates fiduciary duties for anyone with discretionary authority over its management, administration or assets, according to the Department of Labor's page on fiduciary responsibilities (opens in a new tab). Whether to insure depends on the plan's structure, its fiduciaries and service providers, the available limits and wording, and your tolerance for risk. The bond requirement applies either way.

Does insurance remove the fiduciary's duty?

No. Insurance can help pay for a covered claim, but the legal duty and personal liability under ERISA stay in place, subject to the statute and any defenses.