Fiduciary liability insurance for employee benefit plans

Fiduciary liability insurance pays defense costs and covered settlements or judgments when plan participants, the Department of Labor or other claimants say the people running your 401(k), pension or health plan breached their duties under ERISA. It is a claims-made policy that protects both the company and the individuals who serve as fiduciaries. It is different from the ERISA bond the law requires, and different from the employee benefits liability coverage that sits on a general liability policy.

Why plan fiduciaries need their own policy

Under the Employee Retirement Income Security Act, anyone who exercises discretionary control over plan management or plan assets, or has discretionary authority over plan administration, is a fiduciary. The Department of Labor's fiduciary responsibilities page lists plan trustees, plan administrators and investment committee members as examples, and says fiduciaries must act solely in the interest of participants, act prudently, diversify plan investments and follow the plan documents.

The consequence is personal. Under 29 U.S.C. § 1109(a), a fiduciary who breaches those duties must make good to the plan any losses resulting from the breach and restore any profits made through use of plan assets. The company's HR director who sits on the benefits committee and approves a fund lineup or a recordkeeper can be named personally. And under 29 U.S.C. § 1110, a clause in a plan document that purports to relieve a fiduciary of that responsibility is void as against public policy. You cannot contract your way out. You can insure.

Who sues: participants and beneficiaries, other fiduciaries, and the Secretary of Labor can bring actions under 29 U.S.C. § 1132. If the Secretary recovers money from a fiduciary through a court order or settlement, a civil penalty of 20 percent of the applicable recovery amount applies under section 502(l).

Case law has also made plan-fee suits easier to plead. In Cunningham v. Cornell University, decided April 17, 2025, the Supreme Court held that ERISA's prohibited-transaction exemptions are affirmative defenses the defendant must raise and prove, so plaintiffs need only plausibly allege the elements of a prohibited transaction to get past a motion to dismiss. For fiduciaries, that is a lower bar at the pleading stage, which can mean more suits reach discovery and more defense spending, which the policy pays.

What the policy covers

A fiduciary liability form generally insures the sponsoring company, the scheduled benefit plans, and the individuals who act as fiduciaries, including committee members and trustees. IRMI's overview says the policy covers damages, judgments, settlements and defense costs, usually on a duty-to-defend basis, with defense costs reducing the limit and the deductible applying to both defense and indemnity.

Typical covered allegations:

• Imprudent investment options or excessive fees in a 401(k) or 403(b) plan
• Failure to monitor service providers, advisers or other fiduciaries
• Conflicts of interest and prohibited transactions
• Errors administering the plan: wrong calculations, failure to follow plan terms, late or incorrect eligibility decisions
• Claims related to health and welfare plans run by the employer, such as an improper determination or a failure to follow plan documents

Many forms combine fiduciary liability with employee benefits liability, the ordinary-negligence exposure IRMI describes, under one insuring agreement. If your policy is only the CGL endorsement, it is not a fiduciary policy. See Employee benefits liability coverage: insuring HR administration errors.

Voluntary correction and settlement programs

Most forms have a second insuring agreement for government settlement programs. IRMI says these are usually written with a sublimit or "a specific, separate limit of coverage, generally $100,000," although that article is from 2018, so check current forms. The sublimit matters when you self-report a mistake. The Department of Labor's Voluntary Fiduciary Correction Program lets a plan official fully correct 19 categories of violations, including delinquent participant contributions and below-market loans to parties in interest, and apply for a no-action letter. It is not available if the plan or applicant is under investigation. The program was updated effective March 17, 2025. Ask whether your form's "settlement program" definition includes it, and whether the costs of preparing the filing are covered.

What it does not cover

1. Benefits due. IRMI notes that claims seeking benefits payable to a beneficiary are excluded so the policy does not guarantee the plan's own obligations. If the plan owes the benefit, the plan or the sponsor pays.
2. Underfunding. Failure to fund a plan in accordance with ERISA is excluded, though defense of the allegation is usually still provided.
3. Fines, penalties and taxes. IRMI lists taxes, sanctions and criminal or civil fines as excluded. Ask how the form treats the section 502(l) penalty and the penalties for late Form 5500 filings (form 5500 for health and welfare plans: who files and when).
4. Dishonesty. Fraud is excluded, but an innocent-insured provision protects people who did not commit or know about it, so a rogue bookkeeper does not cost the committee its defense.
5. Bodily injury and workers' compensation belong on other policies.
6. ERISA exclusions elsewhere. D&O policies typically exclude ERISA fiduciary claims, and cyber policies may carry ERISA exclusions that matter after a participant-data breach. Read the exclusion on every policy, not just this one.

Fiduciary insurance, bonds and who pays the premium

ERISA requires most people who handle plan funds to be covered by a fidelity bond. A bond pays the plan for theft or fraud by a person who handles its money, and it is not liability insurance for the fiduciaries. The Labor Department's Field Assistance Bulletin 2008-04 sets the amount at 10 percent of the funds handled, subject to a $1,000 minimum and a $500,000 maximum per plan official. The comparison is worked through in ERISA fidelity bonds vs fiduciary liability insurance.

Section 1110(b) lets a plan buy fiduciary insurance only if it permits the insurer to seek recourse against a fiduciary who breached. A fiduciary may buy coverage for his own account. And an employer may buy insurance to cover persons who serve in a fiduciary capacity; the recourse condition appears in the plan-purchased provision but not in the employer-purchased one. On the face of the statute, then, the recourse condition attaches to policies the plan buys, not to policies the employer buys. The usual structure is for the company to buy and pay for the policy. Confirm with ERISA counsel that your structure fits.

A hypothetical claim

Say an 80-employee manufacturer sponsors a 401(k) plan, with a three-person benefits committee. A former employee files a putative class action alleging the committee kept expensive share classes and let recordkeeping fees run well above market. Separately, the payroll team discovers that salary deferrals were deposited late for several months.

• The class action. The company notifies the carrier. Defense counsel is assigned, the committee members and company are all insureds, and defense costs erode the limit. Any settlement paid to the plan is a covered loss only if the form's definition of loss and its exclusions permit.
• The late deposits. The company decides to correct under the VFCP. Whether the filing cost falls into the settlement-program coverage depends on the sublimit and definition.
• What stays with the company. Taxes, penalties, benefits the plan owes and the cost of fixing its own process are generally not covered.

All of this is hypothetical. The facts and the wording decide the outcome.

Buying checklist

1. Schedule your plans and committees. List every plan: retirement, health, cafeteria, ESOP. Add automatic coverage for new plans or acquired plans, with a notice requirement.
2. Name the people. Include outside committee members and anyone who signs the Form 5500.
3. Limits. The right amount depends on plan assets, the number of participants, how many plans you sponsor and whether health plans are self-funded. A broker's benchmarking data is more useful than a rule of thumb.
4. Defense inside or outside the limit. See defense costs inside vs outside policy limits: why it matters.
5. Settlement-program coverage. Ask for the VFCP and Delinquent Filer Voluntary Compliance Program to be named, and for the sublimit amount.
6. Retention and the retroactive date. Match the continuity date from the prior policy. When you terminate a plan or sell the company, ask about run-off.
7. Packaging. Many small and mid-size companies buy fiduciary with D&O, EPLI and crime in a Management liability packages: D&O, EPLI, fiduciary and crime; limits can be shared. See Directors and officers (D&O) insurance explained for why that matters.

For a first-time sponsor, ERISA basics for small employers: what the law requires of your benefit plans explains the duties that create the exposure. An ERISA attorney should handle plan-specific questions.

Key takeaways

• ERISA fiduciaries are personally liable to restore plan losses, and plan documents cannot waive that responsibility.
• Fiduciary liability insurance covers defense and covered settlements for breach-of-duty claims, usually on a claims-made basis with defense inside the limit.
• It excludes benefits the plan owes, underfunding, fines and penalties, and dishonest acts, and settlement-program costs are typically limited to a sublimit.
• It is not the ERISA bond and not the employee benefits liability endorsement, and you may need all three.
• Schedule every plan, name every fiduciary, and check how your D&O and cyber forms treat ERISA claims.