Is it mandated that a company with a 401(k) plan must have fiduciary liability coverage if they already have an Employee Retirement Income Security Act of 1974 (ERISA) bond?
Q: Does a company that has a 401(k) plan need to have fiduciary liability insurance if they have the appropriate Employee Retirement Income Security Act of 1974 (ERISA) bond in place? Does the U.S. Department of Labor (DOL) mandate fiduciary liability coverage along with the ERISA bond?
Response 1: An ERISA bond protects plan participants from theft of plan assets. It is a bond—a financial guarantee—and it is not insurance. An ERISA bond does not provide any protection to fiduciaries. If payments are made under the bond, the bond carrier can pursue recovery from fiduciaries and other responsible parties. In contrast, a fiduciary liability policy is written to protect and defend fiduciaries from alleged liability.
There are lots of publications from fiduciary liability insurers that explain the importance of having both. Your client needs an ERISA bond to comply with legal requirements and a fiduciary liability policy to provide insurance protection.
Response 2: Sadly, the DOL does not require a fiduciary liability policy. Your plan administrator needs to advise your insurance provider that the plan exists. The ERISA bond should trigger the agent to offer a policy for such needs. Your failure to do so could be considered negligent under your errors & omissions policy.
Response 3: Fiduciary liability insurance may not be a mandate, but defending an ERISA fiduciary liability claim is very, very expensive. The suits are uncommon, but each trustee needs their own attorney. The legal defense bills will run through the typical $1 million fiduciary limit at rocket speed.
Response 4: The DOL does not mandate that fiduciary liability insurance coverage be in effect for sponsors of 401(k) plans. A document from the DOL outlines duties and responsibilities in this realm: “Meeting Your Fiduciary Responsibilities." However, a prospective fiduciary, either as a company employee or administrator, or an outside service provider, is well-advised to be sure such protection is or will be affected for the exposures arising out of such duties.
Response 5: Mandatory versus wise to have in place are two different things. I am not aware of any mandate. We always offer coverage to our clients that they can then review with their legal advisors and plan administrators. Whether the plan is offered directly or through a professional employer organization (PEO) adds other considerations.
The National Alliance for Insurance Education & Research discusses the topic in an article, “Fiduciary Liability Insurance: Under-loved and Under-utilized."
Response 6: Start with a study of the nature of a bond versus a liability policy. A bond protects the obligee but not the principal. If the plan suffers a loss and the bond pays, the principal has to reimburse the surety. Liability insurance, on the other hand, protects the covered persons or organization from liability resulting from certain acts. These policies are not standard, but you'd like them to cover failure to enroll, faulty investment advice and more.
Response 7: Whether the government requires fiduciary liability coverage is not as important as the need for the benefit plan trustees to have the coverage. Just like directors & officers coverage is vital to directors & officers, so too is fiduciary liability vital to the trustees. If they are sued and you never explained and offered the coverage, that would be grounds for an E&O lawsuit.
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