Many plan sponsors spend a great deal of time selecting investments, reviewing fees, and ensuring contributions are deposited timely. Yet one of the most overlooked aspects of retirement plan administration is fiduciary liability insurance.
Many employers mistakenly assume that their general business insurance policy or ERISA fidelity bond provides complete protection. It does not. An ERISA fidelity bond protects the plan against losses caused by fraud or dishonesty involving plan assets. Fiduciary liability insurance, on the other hand, is designed to protect the individuals and entities serving as plan fiduciaries when claims are made alleging breaches of fiduciary duty.
Even the most diligent fiduciaries can face claims from participants, beneficiaries, regulators, or other parties. A participant may allege excessive fees, improper investment selection, inadequate oversight of service providers, or errors in plan administration. Whether those allegations ultimately prove valid is often beside the point. Defending against such claims can be expensive and time-consuming.
Fiduciary liability insurance can help cover defense costs, settlements, and certain judgments, depending on the policy terms. While no insurance policy eliminates fiduciary responsibility, it can provide an important layer of protection when problems arise.
The reality is that retirement plans have become increasingly complex. Regulatory scrutiny has increased, participant lawsuits have become more common, and fiduciaries are expected to maintain prudent processes and oversight. The risks are real, even for employers acting in good faith.
Plan sponsors should work with qualified insurance professionals to review their coverage and determine whether fiduciary liability insurance is appropriate for their situation. They should also understand the policy’s exclusions, limits, and reporting requirements.
A retirement plan represents a significant commitment to employees’ financial futures. Protecting the individuals responsible for overseeing that plan should be part of every employer’s risk management strategy. Fiduciary liability insurance is not a substitute for good governance, but it is an important safeguard when governance alone is not enough.