It’s critically important for plan sponsor clients of 401(k) advisors to understand what fiduciary insurance is and what it does.
Fiduciary insurance covers fiduciaries to an employer-sponsored retirement plan in the event they are charged with breach of fiduciary duty. It protects and pays the legal liability from claims for alleged failure to act prudently with regards to a retirement plan.
Unlike a fidelity bond, that protects business owners for losses that result from fraudulent or dishonest employee actions, fiduciary insurance can help cover the cost of legal expenses as well as any settlement expenses should a plan sponsor be charged with a breach of fiduciary duty by either a plan participant or the Department of Labor.
Fiduciary insurance is not required because inherently, as a fiduciary, legal liability is personal, absolute, and unlimited with regards to Employee Retirement Income Security Act (ERISA) claims. ERISA requires plans to provide participants with information about the plan, set standards and requires a claims and appeal process to be established for participants. It also gives participants the right to sue for benefits and breaches of fiduciary duty.
Clients should be aware that anyone who is a fiduciary to the plan can be held personally liable for ERISA claims and may want to investigate coverage options, be it a business owner, trustee to the plan or anyone on the retirement plan committee. Having a policy is a prudent step for them to take to protect the company, the plan and personal assets. It’s important to note, if they are covered by directors and officer insurance (D and O), ERISA claims are often specifically excluded from such policies.
If an ERISA claim is brought against a plan sponsor and/or fiduciary and they aren’t covered, they better get ready to write a big check. If brought to court and charged with a breach of fiduciary duty, not only will they have to make the plan whole for any losses to participants that resulted from the breach in fiduciary duty, but there can also be additional punitive claims, and taxes and surcharges, should the Department of Labor get involved.
In addition to those losses and legal fees, the business may suffer from the loss of time associated with having to deal with a lawsuit. In addition, the focus will be taken from running your business to sorting out the claim.
Nathan Boxx, AIF®, CFP®, is director, retirement plan services and financial advisor at Fort Pitt Capital Group.
With more than 20 years serving financial markets, John Sullivan is the former editor-in-chief of Investment Advisor magazine and retirement editor of ThinkAdvisor.com. Sullivan is also the former editor of Boomer Market Advisor and Bank Advisor magazines, and has a background in the insurance and investment industries in addition to his journalism roots.
