Fiduciary liability insurance

What fiduciary liability insurance is

The two are often confused. A fidelity bond protects the plan against theft or fraud by people who handle plan money, and ERISA requires it. Fiduciary liability insurance protects the fiduciaries themselves, paying defense costs and covered losses when someone claims they mismanaged the plan. ERISA lets a plan buy this insurance only if the policy allows the insurer to recover from a fiduciary who breached a duty. The employer or the fiduciary can buy a policy without that condition.

Why it matters to employers

ERISA makes fiduciaries personally liable for losses caused by a breach. Hiring a 3(16) administrator or a 3(38) investment manager moves specific duties to them, but you keep the duty to choose and monitor those providers. Many directors and officers policies exclude ERISA claims, so check what your existing coverage says.

Example

A company’s CFO sits on its 401(k) committee. Participants sue, claiming the plan’s investments were imprudent. The fidelity bond pays nothing, because nothing was stolen. A fiduciary liability policy would respond to the cost of defending the claim.

Common mistakes

• Assuming the fidelity bond protects the fiduciaries.

• Assuming a directors and officers policy covers ERISA claims.

• Having the plan pay for a policy that does not include the recourse provision.