What It Is, Who Needs It, and Why It Matters More Than Ever • Benzinga

Understanding Fiduciary Liability Insurance

Fiduciary liability insurance is a specialized form of professional liability coverage designed to protect individuals and organizations that manage employee benefit plans. This includes anyone who exercises discretionary authority or control over a plan’s administration or assets—typically employers, HR professionals, and retirement plan trustees.

In the eyes of the law, these fiduciaries are held to a high standard under the Employee Retirement Income Security Act (ERISA) of 1974. If they breach their fiduciary duty—intentionally or not—they can be held personally liable. Fiduciary liability insurance helps protect against the legal and financial fallout of such allegations.

Why Fiduciary Liability Matters More Than Ever

The landscape of employee benefits is evolving rapidly. With complex 401(k) structures, rising healthcare costs, and growing litigation trends, employers are increasingly exposed to fiduciary-related lawsuits. In 2023 alone, the U.S. Department of Labor (DOL) reported over 1,000 civil investigations under ERISA, recovering more than $1.4 billion in direct payments to plans, participants, and beneficiaries.

Plan sponsors now face scrutiny not only from government regulators but also from plan participants themselves. In fact, class action suits against 401(k) and 403(b) plans have surged in the last five years, with settlement amounts often ranging in the tens of millions. Allegations commonly involve excessive fees, poor investment choices, or a failure to monitor plan performance.

This shifting risk environment makes fiduciary liability insurance more than a “nice to have”—it’s a necessary shield against unpredictable and costly legal claims.

What Does Fiduciary Liability Insurance Cover?

Unlike ERISA fidelity bonds, which protect the plan from fraud or dishonesty by a fiduciary, fiduciary liability insurance is designed to protect the fiduciary themselves. Coverage typically includes:

• Legal defense costs: Whether the claim has merit or not, defending against fiduciary lawsuits is expensive. This coverage pays for attorneys, court fees, and expert witnesses.
• Settlements and judgments: If a court rules against the fiduciary or a settlement is reached, the policy can help cover the resulting costs, often up to policy limits.
• Regulatory penalties: Some policies offer limited coverage for civil penalties imposed by the DOL or IRS related to fiduciary breaches.
• Administrative errors: Coverage may extend to mistakes such as incorrect plan documentation, improper benefit calculations, or failure to enroll eligible employees.

Fiduciary liability insurance may also include coverage for claims arising from:

• Wrongful denial or change of benefits
• Improper advice or disclosures to plan participants
• Conflicts of interest or self-dealing
• Failure to diversify investments

Importantly, policies often exclude acts of fraud, criminal behavior, or personal profit at the expense of the plan. Employers should review these exclusions carefully to understand the true scope of protection.

Who Needs Fiduciary Liability Insurance?

Any organization that sponsors an employee benefit plan—regardless of size—is potentially at risk. This includes:

• Private companies
• Public corporations
• Nonprofit organizations
• Educational institutions
• Municipal employers

Even if an outside administrator manages the plan day-to-day, fiduciary responsibility may still lie with internal decision-makers. For example, if a CFO or HR manager chooses the plan provider or approves investment options, they are a fiduciary under ERISA.

Moreover, many companies mistakenly assume that directors and officers (D&O) insurance will cover fiduciary breaches. However, most D&O policies specifically exclude ERISA-related claims. Without a standalone fiduciary liability policy, these individuals may find themselves financially exposed.

Real-World Examples of Fiduciary Risk

To understand the value of fiduciary liability insurance, it helps to look at real cases:

• Excessive fee litigation: A large hospital system was sued by plan participants alleging that its 403(b) retirement plan charged unreasonably high fees and failed to monitor performance. The case settled for $18.1 million, with legal costs covered by fiduciary liability insurance.
• Improper investment allocation: A regional bank faced litigation when its retirement plan heavily invested in company stock, which later plummeted in value. Employees claimed a failure to diversify and monitor risk. Fiduciary liability coverage helped offset a seven-figure judgment.
• Administrative errors: A manufacturer failed to properly update its benefits plan, resulting in thousands of employees being under-enrolled in a healthcare package. The DOL imposed penalties and employees filed a class action. Fiduciary liability insurance helped cover both the fine and legal defense.

These examples demonstrate that fiduciary claims don’t require bad intentions—just an error in judgment or administration can trigger significant costs.

How Much Fiduciary Liability Coverage Do You Need?

The appropriate amount of coverage depends on several factors:

• Size of the employee benefit plan: Larger plans with more assets at stake tend to attract more scrutiny and carry higher liability exposure.
• Number of plan participants: More participants typically equate to higher risk of litigation.
• Complexity of the plan structure: Plans offering multiple investment options, matching contributions, or profit-sharing features carry additional fiduciary responsibilities.
• Litigation climate: Employers in industries or regions with higher rates of fiduciary lawsuits may need enhanced protection.

A common starting point is a $1 million policy limit, but many midsize and large employers carry $5 million to $25 million or more, depending on their exposure.

Fiduciary Insurance Costs and Underwriting

Premiums for fiduciary liability insurance vary widely based on the risk profile of the employer and the structure of the plans. Factors affecting pricing include:

• Total assets under management in the plan
• Prior claims history
• Quality of plan governance and documentation
• Fiduciary training programs
• Use of outside investment advisors or third-party administrators

For a company with fewer than 100 employees and a $10 million 401(k) plan, annual premiums might range from $2,500 to $7,500 for $1 million in coverage. Larger organizations can expect to pay significantly more, especially if they have a history of claims or have faced DOL scrutiny.

Underwriters typically ask for the following documentation:

• Summary plan descriptions (SPDs)
• Most recent Form 5500 filings
• Investment policy statements
• Fiduciary committee meeting minutes
• Details about service providers and fee disclosures

A clean, well-documented fiduciary process not only helps reduce premiums but also positions the company more favorably in court if a claim arises.

Fiduciary Liability vs. Other Coverages

It’s critical to distinguish fiduciary liability insurance from related types of insurance:

• ERISA Bond: Required by law for anyone who handles plan assets. Protects the plan, not the fiduciary.
• D&O Insurance: Protects executives against claims related to business decisions, not fiduciary missteps.
• Employment Practices Liability (EPL): Covers HR-related claims like discrimination or wrongful termination, but not benefits mismanagement.

A well-rounded risk management strategy often includes all of the above. However, fiduciary liability fills a specific gap that other policies do not address.

What to Look for in a Policy

When evaluating fiduciary liability insurance, plan sponsors should look for:

• Broad definition of “fiduciary”: Ensure it covers not only named fiduciaries but also anyone involved in plan management or administration.
• Defense outside policy limits: Legal defense costs can erode policy limits quickly. Some policies offer “defense outside the limits” (DOL) to preserve funds for settlements.
• Coverage for regulatory investigations: Look for endorsements that extend coverage to DOL or IRS inquiries, even if no formal lawsuit is filed.
• Retroactive coverage: ERISA allows participants to file claims years after the fact. Retroactive dates ensure older decisions are still covered.
• No hammer clause: A clause that penalizes the insured for refusing a settlement may not be in your best interest if you believe the claim is defensible.

Careful review of these clauses can make the difference between a policy that provides true protection and one that leaves you exposed.

Steps Employers Can Take to Minimize Fiduciary Risk

While insurance is vital, proactive plan management is equally important. Employers can limit exposure by:

• Establishing a formal fiduciary committee
• Conducting regular plan reviews and benchmarking fees
• Documenting all decisions related to investments and service providers
• Providing fiduciary training to HR and finance staff
• Using ERISA 3(21) or 3(38) advisors for investment oversight
• Ensuring proper disclosures and communication to plan participants

By combining these practices with adequate insurance, employers strengthen both their compliance posture and their defense in the event of litigation.

Fiduciary Liability Trends to Watch

The fiduciary landscape is expected to become more complex in the coming years. Key developments include:

• Increased ESG scrutiny: As more plans consider environmental, social, and governance (ESG) factors in investment strategies, questions about fiduciary prudence will rise.
• Cybersecurity obligations: DOL guidance now emphasizes the fiduciary duty to safeguard participant data. Breaches could lead to fiduciary claims.
• Expanded enforcement efforts: Regulatory agencies have been ramping up audits and compliance checks, especially around fee transparency.
• Litigation around health plans: In addition to retirement plans, fiduciary lawsuits are increasingly targeting mismanagement of self-insured medical benefits.

These trends suggest that fiduciary risk is no longer limited to large corporations or pension plans. Employers of all sizes should reassess their vulnerabilities and ensure their insurance coverage keeps pace.

Fiduciary Liability Insurance Explained: Quick Answers to Key Questions

What Is Fiduciary Liability Insurance in Simple Terms?

Fiduciary liability insurance is a type of policy that protects individuals and organizations who manage employee benefit plans—like 401(k)s, pension plans, and group health insurance—from being held personally liable if they make mistakes or poor decisions. These plans are governed by the Employee Retirement Income Security Act (ERISA), which places legal duties on fiduciaries to act in the best interest of plan participants.

If a fiduciary breaches that duty—intentionally or by accident—they could face lawsuits, fines, and out-of-pocket legal costs. This insurance helps cover those expenses.

What Makes Someone a Fiduciary Under ERISA?

A fiduciary is anyone who:

• Has discretionary authority over plan management
• Exercises control over plan assets
• Provides investment advice for compensation
• Has responsibility for plan administration

Importantly, job titles don’t determine fiduciary status—functions do. Even if your company uses a third-party administrator, internal decision-makers may still be legally responsible as fiduciaries.

What Is the Difference Between Fiduciary Liability and ERISA Bonds?

This is a common point of confusion. Here’s a breakdown:

You need both if you’re managing a retirement or health benefits plan.

Does My Company Need Fiduciary Liability Insurance?

If your business offers employee benefits like a retirement plan or health coverage—and if internal staff has any authority over those plans—then the answer is yes.

Even with outsourced plan management, your company likely retains fiduciary responsibilities for choosing and monitoring those vendors. Without insurance, legal costs from a claim could devastate a business’s finances and reputation.

What Triggers a Fiduciary Liability Claim?

Claims can be triggered by a wide range of errors or oversights, including:

• Offering imprudent investment options in a 401(k)
• Failing to monitor third-party administrators
• Charging excessive plan fees
• Mishandling enrollment or eligibility decisions
• Providing incorrect or misleading plan information

These issues can result in lawsuits from plan participants, government investigations, or regulatory fines.

How Much Does Fiduciary Insurance Cost?

Premiums vary based on:

• Size of the benefit plan
• Number of participants
• Industry risk profile
• Claims history
• Internal governance and fiduciary practices

Small businesses may pay a few thousand dollars annually for $1 million in coverage, while large corporations may invest tens of thousands depending on plan complexity.

Why Fiduciary Insurance Is a Smart Investment

In an era of rising litigation and regulatory scrutiny, fiduciary liability insurance is a vital safety net. It offers peace of mind for business owners, HR professionals, finance leaders, and benefits managers who make decisions impacting employee retirement and health outcomes.

Even one small error—like failing to switch a default investment fund or overlooking plan fee disclosures—can result in multi-million-dollar lawsuits. Fiduciary insurance ensures you don’t face that risk alone.