Offering employee benefits like retirement savings, stock options, or health plans is a powerful way to attract and retain talent. But managing those benefits also introduces a unique kind of legal exposure: fiduciary responsibility.

Under the Employee Retirement Income Security Act (ERISA), anyone involved in selecting investments, processing contributions, or overseeing plan administration must act in the best interest of plan participants. When a mistake or oversight leads to losses, those individuals — and the company itself — can be held personally liable.

Fiduciary liability insurance steps in to protect your business and its decision-makers from claims tied to errors in managing employee benefit plans. It helps pay for legal defense, settlements, and other costs that can arise even from well-intentioned decisions.

Below, we break down what this coverage includes, where its limits lie, and how it differs from related protections like ERISA bonds.

What Fiduciary Liability Insurance Covers

Fiduciary liability insurance covers a wide range of risks tied to how employee benefit plans are structured and run. It protects both the company and the individual fiduciaries, such as founders, HR leads, finance officers, or trustees, whose decisions affect those plans.

Administrative Errors and Omissions

Mistakes happen, even in well-run organizations. Coverage applies to unintentional errors like miscalculating contributions, failing to enroll an employee, or delaying plan updates. These administrative lapses can lead to claims from employees or regulators, and fiduciary coverage helps absorb the financial impact.

Mismanagement of Plan Assets

When plan participants allege that investments were poorly chosen, underperforming, or too risky, fiduciary coverage can respond. It helps pay for defense and settlement costs if fiduciaries are accused of not acting prudently or of allowing excessive plan fees.

Inaccurate or Incomplete Information

If employees claim they were misinformed about their benefits — for example, given outdated plan details or incorrect contribution limits — this policy can cover resulting disputes. Communication errors and documentation oversights are among the most common triggers for claims.

Wrongful Denial or Reduction of Benefits

Coverage extends to situations where benefits are denied or reduced in error, such as when system issues or miscommunications lead to someone losing coverage or receiving less than they’re owed.

Conflicts of Interest and Prohibited Transactions

ERISA prohibits decisions that favor the company or its leaders over plan participants. If a fiduciary is accused of benefiting personally from vendor selection, fee structures, or investment choices, fiduciary liability insurance can fund the legal defense and potential settlements.

Defense Costs and Regulatory Investigations

Fiduciary policies often include protection for investigations brought by the Department of Labor (DOL) or Internal Revenue Service (IRS). Some also help cover penalties tied to compliance correction programs, which can add up quickly in an audit or enforcement action.

Personal Asset Protection for Fiduciaries

Because ERISA allows personal lawsuits against fiduciaries, this insurance extends beyond the company itself. It helps safeguard the personal finances of executives, HR professionals, and trustees named in a claim, including their savings and investments.

What Fiduciary Liability Insurance Doesn’t Cover

While fiduciary liability insurance is broad, it doesn’t apply to every type of issue. It’s intended for unintentional missteps, not deliberate misconduct. Common exclusions include:

• Criminal acts or fraud, including theft or embezzlement of plan funds
• Known issues or prior claims from before the policy’s start date
• Failure to fund benefit plans or make required contributions
• Bodily injury or property damage, which fall under General Liability insurance
• Errors by third-party administrators, who need their own professional liability coverage
• Workplace disputes, such as harassment or discrimination, which are covered under Employment Practices Liability (EPLI)

In short, fiduciary liability insurance addresses negligence and administrative oversight, not intentional wrongdoing or unrelated business risks.

Fiduciary Liability Claim Examples

Fiduciary liability claims can arise in many ways, from everyday mistakes to broader compliance issues. Here are a few common scenarios:

• Late Contributions: A startup delays remitting employee 401(k) deductions due to a payroll transition. The DOL investigates, imposing penalties and requiring back payments.
• Excessive 401(k) Fees: Employees file a class action alleging plan managers failed to monitor investment fees, leading to losses.
• Misinformation: An HR team provides outdated plan details to an employee nearing retirement, resulting in unexpected coverage gaps.
• Administrative Error: A new hire isn’t added to the health plan on time, and their medical expenses go uncovered.

In each case, fiduciary liability coverage may help pay for legal defense, settlements, and other costs that could otherwise fall directly on the company or its leaders.

ERISA Bonds vs. Fiduciary Liability Insurance

It’s easy to confuse fiduciary liability coverage with the ERISA fidelity bond — but they serve very different purposes.

An ERISA bond is required by federal law for any company that handles employee benefit funds. It protects the plan itself if someone steals or misuses those assets.

Fiduciary liability insurance, on the other hand, protects the people overseeing those plans when they’re accused of making a poor decision, offering bad advice, or failing to meet their obligations under ERISA.

Think of it this way:

• The ERISA bond covers theft of plan assets.
• Fiduciary liability insurance covers errors in how those assets and plans are managed.
  

Both are vital: one is about safeguarding the money, the other about protecting the people and decisions behind it.

Fiduciary Liability vs. Other Business Coverages

Fiduciary liability insurance helps companies meet their obligations under ERISA while protecting leaders from costly mistakes in managing employee benefit plans. It fills the gap left by required ERISA bonds, offering coverage for defense, settlements, and investigations tied to mismanagement or administrative errors.

For growing companies that want to offer competitive benefits without taking on unnecessary legal risk, fiduciary liability insurance is a key part of a modern risk management strategy.

Frequently Asked Questions

What types of claims does fiduciary liability insurance handle?

It covers administrative errors, plan mismanagement, misleading communications, and defense costs for government investigations or lawsuits related to benefit plans.

Who qualifies as a fiduciary under ERISA?

Anyone with discretionary authority over a benefit plan, including executives, HR leaders, trustees, and investment committee members.

Does an ERISA bond replace fiduciary liability coverage?

No. The bond protects the plan’s assets from theft, while fiduciary liability insurance protects the people responsible for managing the plan’s operations and compliance.

What exclusions should I be aware of?

Intentional misconduct, prior claims, and employment-related lawsuits are typically excluded.

Is fiduciary insurance necessary for small businesses?

Yes. Even small teams that offer a 401(k) or health plan can face fiduciary exposure, since ERISA doesn’t distinguish by company size.

Vouch Specialty Insurance Services, LLC (CA License #6004944) is a licensed insurance producer in states where it conducts business. A complete list of state licenses is available at vouch.us/legal/licenses. Insurance products are underwritten by various insurance carriers, not by Vouch. This material is for informational purposes only and does not create a binding contract or alter policy terms. Coverage availability, terms, and conditions vary by state and are subject to underwriting review and approval.

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