A fiduciary liability insurance policy (FLIP) is a critical yet frequently misunderstood insurance product. It offers essential coverage for individuals who manage or administer employee benefit plans, ranging from high-level corporate executives who appoint investment managers to payroll clerks who handle enrollment forms.
As the legal landscape becomes more complex with increasing litigation and regulatory scrutiny, employers and plan fiduciaries face greater accountability for their actions (or lack thereof) in managing these plans. In this environment, FLIPs protect against potential liabilities, making them an indispensable part of a robust risk management strategy for any business overseeing employee benefit plans.
Despite the essential coverage provided by FLIPs, a recent survey found that only 25% of small businesses carry fiduciary insurance. However, the same study found that 72% of companies intended to purchase it.
This blog post explores the fundamentals of fiduciary liability insurance and outlines what you need to know when shopping for a policy.
Who needs fiduciary liability insurance?
In essence, any company that provides welfare or retirement benefits to its employees should have fiduciary insurance.
Why?
The Employee Retirement Income Security Act (ERISA) legally makes anyone who handles employee benefits a fiduciary. Fiduciaries must make responsible financial decisions on behalf of the employees they represent. According to ERISA, “fiduciary” applies broadly to anyone who manages employee benefits, from the executives who appoint fund managers to the entry-level HR benefits specialist.
Even when benefits management is outsourced, organizations remain vulnerable to fiduciary claims. Should a third-party plan administrator make a mistake, business owners can still be held accountable and may be required to cover claims using both business and personal assets. Note that third parties are not covered under most FLIPs, as they should have their own coverage (more on other exemptions below).
Also read: How Immigration Audits Put Employers at Risk and How to Prepare
What does this product cover?
Fiduciary liability insurance typically provides coverage for errors and omissions that occur during the administration of employee benefits. Employee benefits and retirement plans are notoriously complex to manage, and a simple oversight can expose your organization to liability.
While plans vary, here is a list of what FLIP coverage from McGowan Professional covers:
- Negligent Administration / Management: Failing to appoint a trustee or manage the plan in a timely or appropriate manner
- Administrative Errors and Omissions: Not processing employees’ requests correctly, such as failing to enroll or change benefit choices
- Conflicts of Interest / Prohibited Transactions: Choosing an investment strategy that benefits a fiduciary or involves prohibited transactions that are not in the best interest of plan participants
- Imprudent Selection or Failure to Monitor Third-Party Service Providers: Selecting or failing to monitor third-party providers, like a plan operator, who fail to make timely contributions or perform poorly
- Poor Investment Decisions / Negligent Investment Practices: Imprudent investment decisions, such as a lack of investment diversification
- Improper Use of Retirement Funds: Using employee retirement funds for other purposes or investments not permitted under the plan rules, such as leveraging funds
- Charging Excessive Fees: Failing to disclose or address higher fees can negatively impact the plan’s financial performance
- Wrongful Denial / Improper Change in Benefits: Reducing benefits or wrongfully denying benefits to employees, such as changing their hours to avoid paying benefits
- Improper Advice or Counsel: Providing poor advice or counsel, such as missing essential enrollment deadlines or giving incorrect guidance regarding plan options
What is not covered by FLIP?
It is important to note that fiduciary insurance covers unintentional errors, and not criminal acts such as fraud or embezzlement. Additionally, third-party benefits managers, including investment advisors, should have their own coverage. Note that it is best practice to ask any third-party organizations for certificates of their own FLIP coverage or other relevant insurance before hiring to ensure you are not taking on unnecessary liability.
Also, funding shortfalls within benefit or retirement plans are not covered by FLIP coverage, as the purpose of ERISA bonds is to ensure that benefit plans are funded, despite theft or fraud.
How much does fiduciary insurance cost?
Several factors influence the cost of fiduciary liability insurance:
- Organization Size and Type: Larger organizations and those with higher risk levels typically require more extensive coverage, leading to higher premiums.
- Scope of Coverage: The breadth of coverage needed also impacts the cost. For example, an organization managing multiple employee benefits plans will likely need more comprehensive coverage than one managing a single plan.
- Insurance Provider: The insurance costs can vary significantly among providers and their specific policy offerings.
Beyond these core factors, other considerations can affect the cost of fiduciary liability insurance, including the organization’s claims history, the inherent risk within the industry, and the chosen deductible and liability limits.
Depending on these factors, a small-to-medium-sized organization can expect to pay between $500 and $2000 per year for a FLIP.
Confusion about ERISA bonds
Fiduciary liability insurance is the only insurance designed to protect fiduciaries from claims of breaching their duties. Many people mistakenly believe that ERISA bonds and employee benefits liability (EBL) insurance offer complete fiduciary protection, but this is untrue.
ERISA bonds are legally required and protect the plan and its participants if an employee handling plan funds acts fraudulently or dishonestly. However, they do not cover other types of fiduciary breaches.
EBL coverage is usually an add-on to a general liability policy and offers minimal protection. It only covers errors in plan administration, like mistakes with enrollment or eligibility advice. It does not cover serious fiduciary breaches such as bad investment decisions or carelessly choosing service providers. In fact, FLIP often provides broader coverage for administrative errors than EBL.
For more on this topic, read our ebook: Common Misconceptions About ERISA
Why McGowan Pro?
FLIPs are vital for risk management. They help monitor, safeguard resources, and foster stakeholder confidence. Organizations identify and mitigate financial losses, protecting assets and ensuring stability. Effective FLIP implementation involves assessing risks, tailoring coverage, and continuous monitoring.
At McGowan Professional, we simplify the process of securing the right coverage for your business. Our customized insurance products ensure our clients receive the precise protection they need, quickly and efficiently.
We provide customizable coverage for:
- Accountants & CPAs
- Bookkeepers
- Investment Advisors
- Lawyers
To learn more about our fiduciary liability insurance, visit our website.