Do You Need Fiduciary Liability Insurance?
If you are a business owner or executive who has decision-making authority over an employee benefit plan, then you are considered a ‘fiduciary’ under the Employee Retirement Income and Security Act of 1974 (ERISA). However, ERISA does not require a fiduciary to carry Fiduciary Liability Insurance. So, the question looms – should you have such insurance?
As a fiduciary, your personal assets are at risk in the event of a fiduciary breach, and you can be subject to fines, penalties and/or lawsuits. Thus, the straightforward answer is — yes, it is certainly prudent to protect yourself from such an occurrence.
Many business owners, however, mistakenly think that a fidelity bond (which is required by ERISA) will cover them in the event of a breach or lawsuit. Unfortunately, that is not the case. A fidelity bond protects the plan assets due to theft or dishonesty; it does not protect the fiduciary.
The minimum amount of coverage required for an ERISA fidelity bond per fiduciary is 10% of plan assets, with a minimum bond of $1,000. The maximum bond amount is $500,000, unless there is company stock in the plan, in which case the maximum is $1 million.
In contrast, Fiduciary Liability Insurance covers the individual fiduciaries in the event of a lawsuit or breach. Such policies can cover paying for your defense or any judgments, fines and penalties.
Fiduciaries should also be aware that lawsuits may be brought against them by a number of parties: plan participants, participants’ estates, the Department of Labor (DOL), or the Pension Benefit Guaranty Corporation (PBGC).
And the reasons for such a lawsuit are even more varied:
- Lack of diversified investments
- Imprudent investment options
- Improper handling of plan assets
- Lack of oversight of service providers
- Negligence in administration of the plan
- Conflicts of interest relating to the investments
- Failure to follow the plan document
According to Towers Perrin1, the average defense cost for this type of breach is $365,000, and the cases are resolved for the plaintiffs 69% of the time. If you are covered with D&O (Directors and Officers) insurance, you should check the provisions to see if claims relating to an ERISA plan are excluded.
Maintaining a qualified employee benefit plan carries with it a significant amount of responsibility. And with that responsibility there is potential liability. Don’t leave yourself uncovered. If you are unsure what your responsibilities are, or if you are unsure if you have exposure or not, speak with a qualified fiduciary advisor that can guide you through these discussions.
1Towers Perrin Tillinghast Survey