Does your 401k plan have adequate insurance?

When a company sponsors a 401(k) plan, they get the benefits of reducing payroll taxes, receiving tax credits, and attracting better employees among other things. But they also open themselves up to certain liabilities they may not even be aware of.

Under the Employee Retirement Income Security Act (ERISA), fiduciaries can be held personally responsible for breaches of their fiduciary duties. These breaches of duties can range anywhere from simple administrative errors, through failing to adequately fund a plan or offering unsuitable investments.

Enter Fiduciary Liability Insurance

Due to these legal concerns, private companies may want to consider Fiduciary Liability Insurance (FLI). FLI helps protect the assets of both the company and fiduciaries of a plan in the event of a lawsuit.

Depending on the policy, it can even go as far as covering legal fees and supplying your defense counsel. Fiduciary liability insurance fills the voids between traditional coverage provided by the employee benefits liability section of a general liability insurance policy, and/or directors & officers liability insurance.

As a fiduciary, you can never truly eliminate your liability exposure. With the use of insurance, it can certainly be mitigated.

Fiduciaries without FLI can be held personally responsible for all litigation costs and settlement without the proper protection.

What’s an ERISA bond then?

To further protect the participants within a 401k plan, ERISA requires that a fidelity bond be in place covering a minimum of 10% of the plan total (up to $500,000 in coverage). This covers the participants from fraudulent behavior from any fiduciary – or individual – who handles any plan assets.

Unlike FLI, the bond does not pay for damages on your behalf. An ERISA bond is there only as a last resort for participants in the event that a plan fiduciary is unable to cover all damages from a given lawsuit.