Do You Need Fiduciary Liability Insurance for Retirement Benefit & 401(k) Plans?
Fiduciary liability insurance is one of those lesser-known insurance packages designed to protect businesses from any potential defense or damage expenses because of a claim that was filed against them due to alleged negligence or even the mismanagement of 401(k) and/or retirement benefit plans. It’s important to note that errors and omissions claims resulting from any mistake in handling or explaining these types of benefit plans are not covered by a typical business owner’s insurance policy and will also not be covered under a typical commercial general liability policy.
Enter fiduciary liability insurance or FLI. Offering and administering employee benefit opportunities should be a great asset to your business and a chance to attract and retain top talent, not leave your business exposed. It helps cover the gaps, but too few business owners who offer retirement benefits and 401(k) plans are aware of this special insurance coverage.
Here is why you need it.
You may be held personally liable for the mishandling of employee benefit plans.
You read that right. There is something called the “Employee Retirement Income Security Act of 1974” (or ERISA) enacted by the United States Department of Labor, which regulates any employer-provided plans – whether that’s profit sharing, disability, health, and, of course, retirement. Under the ERISA, if a benefits plan has not been handled properly or the benefits of that plan end up being lost, the plan administrator – the fiduciary – is personally liable to make up for any benefits that were lost, or personal losses that ensued because of the mismanagement.
This is true even if you aren’t the business owner. So long as you’re the one who is responsible for the deliverance and management of your company’s employee benefit plans – business owner, human resources manager – you can be held liable, and that means you’ll be left on the hook for any damages and/or expenses that may result. The solution is fiduciary liability insurance, but it isn’t mandated in any one state. That being the case, you still need it.
Employee Benefits Liability Insurance vs Fiduciary Liability Insurance
Employee benefits liability insurance and FLI are similar, but they have a few key differences. Fiduciary liability insurance can serve under a management liability insurance policy, whereas employee benefits liability (EBL) is typically separate.
EBL, in essence, protects businesses from a specific range of errors and omissions with several different employee benefits plans – from dental to disability.
FLI protects businesses from any exposures their business may be at risk of according to the terms of the Employee Retirement Income Security Act and includes coverage for several specifically designated plans. FLI goes the extra mile and includes breaches of fiduciary duty in the administration of specific benefits plans as well as administrative “errors and omissions.” Your EBL insurance won’t cover any claims that come of ERISA violations.
Misconceptions about FLI
When it comes to “errors and omissions” coverages, there are a lot of misconceptions. FLI is unique in what it covers: any circumstance where negligence is perceived in the management of a company’s retirement or benefits programs. It shouldn’t be mistaken for other types of liability insurance. Fiduciary liability insurance does not overlap with workers’ compensation, professional liability insurance, commercial general liability insurance, or directors and officers insurance. For the benefits of these particular insurance policies, you may wish to discuss with a Hitchings Insurance Agency representative. You will want to review your policy and/or discuss it with an insurance professional before making any assumptions about whether you have fiduciary liability insurance or not.
Fiduciary Liability Insurance Coverage Examples
Depending on your policy, your exact coverage under your fiduciary liability insurance policy may vary. However, you can expect a standard policy to likely include the following:
- Legal expenses, including settlement fees, awards, defense costs
- A broad range of employee benefit plans
- ERISA and HIPAA penalties
- The organization and/or employee who serves as the firm’s fiduciary
Claims that may be filed under a fiduciary liability insurance policy can include:
- Mismanagement when administering a plan according to its documents
- Wrongful change in benefits
- Poor advice or incorrect enrollment
- Conflicts of interest
- Lack of diversity in investments
You may expect a typical fiduciary liability insurance plan to exclude any intentional actions, including fraud, and stealing. Fidelity bond insurance may offer you the coverage you are looking for in the event of deliberate criminal actions. You may also not be covered if you outsource the administration of your benefits plans to a third party.
Fiduciary Liability and Your Firm’s Risk Management
Fiduciary liability insurance should not replace good risk management, including a rigorous screening process when hiring employees (especially administrators for your company’s benefits programs.) However, it’s a good asset to have as it offers unique coverage that other liability insurance policies may not include, or are specifically excluded. Fiduciary liability insurance offers special benefits that can help keep your organization thriving for years to come, even in the event that a claim does arise.
Insurance can be confusing, but Hitchings Insurance Agency’s representatives are here to help. To further discuss the benefits of fiduciary liability insurance, its coverage capabilities, and whether your business may need it, give us a call today at 419-423-9145 or complete start a quote by filling out a quick form below.