More Fiduciaries, More Litigation Exposure for Plan Sponsors
Three reasons fiduciary liability insurance may make sense
Increasingly, retirement plan sponsors are being sued by plan participants and/or investigated by the DOL for breach of fiduciary duty under the Employee Retirement Income Security Act of 1974 (ERISA). Case law—and the courts’ interpretations of the law—are changing and expanding every day, and indemnification agreements may not hold up in the future. Gaps in traditional plan coverage are not only significant, but they’re also not obvious to plan sponsor clients. It’s these gaps that Fiduciary Liability Insurance seeks to fill.
Fiduciary Liability Insurance (FLI) offers a practical way to help protect plan sponsors and their employees against fiduciary-related claims. FLI is designed to help financially protect against claims of fiduciary breach under ERISA. It can be issued to fiduciaries, plans, or plan sponsor organizations and can provide protection from enterprise risk. Plan sponsors may be able to simply add it to existing policies through their current insurance provider.
Here are three reasons plan sponsors should consider this important extension of coverage:
- Indemnification agreements may provide little shelter. Under ERISA Section 410, plans are prohibited from indemnifying a fiduciary for a breach of duty.
- Required fidelity bonds only cover theft and fraud. Fidelity bonds (required by law) and FLI (not required under ERISA) policies are designed to work hand-in-hand, since these two safeguards don’t cover the same risks.
- Traditional plan insurance won’t cover breach of fiduciary duty. Employee benefit liability (EBL) insurance generally protects against a wide range of errors or omission claims in plan administration (also often covered by fidelity liability insurance), but it usually excludes breach of fiduciary duty under ERISA.
Advisors should proactively discuss Fiduciary Liability Insurance with plan sponsors. To help evaluate providers and policy provisions when researching Fiduciary Liability Insurance, refer to MainStay Investments’ Fiduciary Liability Insurance Coverage checklist and article on reasons why this coverage is important.
Neither New York Life nor its agents or affiliates provide tax, legal, investment, or accounting advice. Plan sponsors should speak to their own tax, legal, investment advisor, or accounting professional regarding their specific situation. The information contained herein is general in nature and is provided solely for educational and informational purposes.