Does an Employer with a 401(k) Plan Need Fiduciary Liability Insurance?
Today I’m going to go over certain risks and issues around Fiduciary Liability Insurance, 401k plan, and a lot more.
Specifically, I want to differentiate between two common coverage forms in this space – Fidelity, and Fiduciary.
And answer the question of whether an employer with a 401k plan needs fiduciary liability insurance.
Let’s start with Fidelity, often called a fidelity bond or ERISA bond.
Anyone who handles plan funds must be covered by fidelity or ERISA bond.
That bond is there to protect the fund from the depletion of money and securities due to fraudulent or dishonest acts of the trustees and others with access to plan assets.
Your ERISA coverage may be a stand-alone policy or bond, or it may be bundled with other crime insurance coverages on a commercial crime policy.
ERISA mandates that 10% of plan assets are protected by an ERISA or Fidelity Bond up to a maximum of $500,000 unless company stock is held within the plan, then the max is $1M.
Okay, now onto fiduciary and the first question…
Is a fidelity bond or fidelity insurance the same as fiduciary insurance?
These are two entirely different coverage forms. BUT, if you are an employer or a trustee of a plan and are purchasing fidelity coverage you should be considering Fiduciary Liability protection as well.
Fiduciary insurance protects the plan trustees, often the employer or owner of the company from claims which arise alleging breaches of fiduciary duties as defined by ERISA.
The 401k plan trustees are responsible for managing the plan in a prudent manner in the best interest of the employees or participants of the plan.
This includes selecting the right service providers, investment options, investment platforms, third-party administrators, record keepers, etc., and the costs of all providers are reasonable and competitive.
ERISA also mandates that there is a reliable recordkeeping system in place, and that required documentation is distributed to participating employees regularly.
Failure to be prudent or to not review all service providers on a regular basis can lead to legal liability for the plan trustees.
The important point here is that the trustees -as I mentioned, often the employer –
can be held or sued personally under ERISA
The bad news is that no other policy form you may have, other than fiduciary liability will cover the trustees for these types of lawsuits.
Not your general liability insurance, not your D&O insurance, not your homeowners’ insurance or personal umbrella insurance.
This is why fiduciary liability insurance is critically important for many employers.
Why is fiduciary liability coverage needed?
For a couple of reasons. the first I just mentioned, none of your other policies will cover the trustees if a claim arises so you’ll be paying these types of claims out of pocket.
The second and more important reason is that fiduciary lawsuits have been on the rise for the past two years.
In fact, 2020 saw fiduciary class action filings jump fivefold.
These suits often arise over excessive fees, which are driven by law firms that can target employers based on publicly available information. And these suits are expensive to defend against and settle.
Employers large and small – meaning firms with under $1m in plan assets can be targeted.
How much does fiduciary liability insurance cost?
Typically fiduciary liability is added to a management liability policy which provides D&O coverage and in many cases employment practice liability as well.
I often call fiduciary the third leg of the management liability stool, and it helps round out the protection for the executive suite.
The cost used to be between 5 to 10 percent of the D&O premiums, roughly speaking, but today, due to increased litigation around fiduciary it’s no longer priced as an “add-on” to the management policy.
Instead, it’s priced based on plan assets and other factors and can be more in the range of 10 to 20 percent of the D&O premiums.
What if you don’t purchase D&O or management liability? What’s the pricing?
Hard to say because as I mentioned it’s really priced on plan assets, size of the company, and other underwriting factors, but for most small and medium-sized businesses a $1M stand-alone fiduciary liability policy will run in the range of $500 to $2,500.
To wrap it up
If your firm has a 401k plan, the trustees, who are often the company owners and leaders, have personal liability for potential lawsuits that can arise from alleged breaches of fiduciary duty under ERISA.
Because these lawsuits are becoming more frequent and increasing in dollar severity this poses a real threat to company leaders.
And, because no other insurance policy covers claims of this nature it makes the need for Fiduciary Insurance all the more important.
Have other questions I didn’t answer here?
Want to learn more about Fiduciary Liability insurance, or any other form of business insurance?
Give me a call or drop me an email and let’s chat.