Employee Benefit Plans and Fiduciary Liability Insurance

Employee Benefit Plans and Fiduciary Liability Insurance

Most employees take the subject of their benefits program very seriously. If a claim is made, or it is discovered that an employer made an egregious error, or there was a breach of fiduciary duty, an employee make file a lawsuit. The reason for having fiduciary liability insurance is to protect businesses’ and employers’ assets against fiduciary-related claims of mismanagement of a company’s employee benefit plans.

The Employee Retirement Income Security Act (ERISA) or any federal statute does not require purchasing a policy to answer such claims. However, if a claim is ever made against the policyholder of this insurance, it will cover the legal expenses of defending against the claim, as well as the financial losses the plan may have incurred due to errors, omissions or breach of fiduciary duty.

What is considered a breach of fiduciary duty?

A “breach of fiduciary duty” and other errors or omissions that are covered by a fiduciary liability policy, with regard to providing advice on investing employees’ retirement plans, or any action deemed to be poor or negligent investment practices, includes:

  1. Failure to offer adequate diversification options, charging excessive fees, or acting in a way that presents a conflict of interest
  2. Inadequate policy communications or errors in counseling or providing interpretations to employees that result in lost benefits, and
  3. Errors in computing or administering plans, such as improper enrollment or terminations, that result in lost benefits

ERISA regulates all employer plans that provide employee benefits, including health, life, profit sharing, disability, and employee leave, and not just retirement plans. While ERISA doesn’t require employers to establish benefit plans for their employees, it does set out minimum standards for these plans, including a clear code of conduct for fiduciaries who are charged with managing and overseeing employee benefit plans and programs.

Should someone acting as a fiduciary deliberately defraud or steal from the plan, this kind of act would only 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. Simply put, fiduciary liability insurance does not cover fraudulent acts and doesn’t satisfy ERISA bonding requirements.