Sued Over Mismanaging the 401(k) Plan: Fiduciary Liability Paid $500k Defense!
The Lawsuit We Never Saw Coming, From Our Own Employees
Our company was proud of its 401(k) plan. Then, a group of employees filed a class-action lawsuit against the company and the plan’s management committee. They alleged we had breached our duties by allowing the plan to charge excessive fees and by not offering better-performing investment options. We were stunned. The legal battle to prove we had acted prudently was incredibly complex and cost over $500,000 in defense fees alone. Our Fiduciary Liability insurance policy covered every penny, protecting both the company’s assets and the personal assets of the committee members.
Are You Personally Liable for Your Company’s Benefit Plan? YES! Get Fiduciary Insurance.
The Day I Realized My House Was On the Line
I volunteered to be on my company’s 401(k) investment committee. I thought I was just helping my colleagues save for retirement. Then our HR consultant gave me a stark warning. As a plan fiduciary, I was now personally liable for the decisions we made. If we were sued for mismanaging the plan and the company couldn’t or wouldn’t pay the settlement, the plaintiffs could come after my personal assets—my house, my savings, everything. The very next day, I made sure our company had a robust Fiduciary Liability insurance policy in place.
Fiduciary Liability Explained: Protecting Those Who Manage Benefit Plans (ERISA)
Malpractice Insurance for Your 401(k) Committee
Think of a doctor buying malpractice insurance to protect them if they make a mistake treating a patient. Fiduciary Liability insurance is malpractice insurance for the people managing your company’s employee benefit plans. Under a federal law called ERISA, anyone who exercises control over a retirement or health plan has a strict duty to act solely in the best interest of the plan participants. If you breach that duty, you can be sued. This policy pays for your defense and any potential settlements.
What are “Fiduciary Duties”? (Loyalty, Prudence) Insurance for Breaches.
Acting Like It’s Their Money, Not Yours
Being a fiduciary comes with two main duties. The first is the Duty of Loyalty, which means every decision you make must be solely for the benefit of your employees, not the company or yourself. The second is the Duty of Prudence, meaning you must act with the skill and care of a prudent expert. For example, failing to benchmark your 401(k) plan’s fees against the market could be seen as a breach of prudence. Fiduciary Liability insurance is specifically designed to defend you when a lawsuit alleges you failed in one of these critical duties.
Common Fiduciary Liability Claims: Excessive Fees, Poor Investment Choices, Denied Benefits
Three Simple Mistakes, Three Big Lawsuits
My friends at three different companies all faced fiduciary lawsuits. The first company was sued for allowing their 401(k) plan to have excessive administrative fees, which eroded employee returns. The second was sued for offering a slate of poorly performing investment funds while better, cheaper options were available. The third, which self-funded its health plan, was sued for improperly denying a large medical claim. In each case, employees alleged that the fiduciaries had failed to act in their best interest, triggering a costly legal defense.
Who Needs Fiduciary Liability Insurance? Any Company Sponsoring Benefit Plans!
The Moment You Offer a 401(k), You Have This Risk
I used to think Fiduciary Liability was only for giant corporations with huge pension plans. When my small 20-person tech company started offering a 401(k) and a group health plan, our broker insisted we buy a Fiduciary policy. He explained that the moment a company sponsors a benefit plan governed by ERISA, it automatically creates fiduciary duty and exposure to lawsuits. It doesn’t matter if you have five employees or 5,000. If you offer benefits, you have this risk.
How Much Fiduciary Coverage is Enough? (Based on Plan Assets)
The Simple Formula That Set Our Limit
I had no idea how much Fiduciary Liability coverage to buy. My agent showed me the industry rule of thumb. Insurers typically recommend a limit that is at least 10% of the total assets in your employee benefit plans. Our 401(k) plan had grown to about $8 million in assets. Using that formula, he recommended a policy with at least a $1 million limit. For companies with smaller plans, a $1 million limit is a common starting point, but the amount of coverage should always be tied to the amount of money you are responsible for.
Comparing Fiduciary Liability Policies: Definitions and Exclusions are Key!
The Definition of “Loss” That Saved Our Claim
We were comparing two Fiduciary Liability quotes. One was cheaper, but its definition of “Loss” was very narrow. The more expensive policy had a broader definition that specifically included coverage for “settlor” decisions—business decisions about the plan, like choosing to amend it. A year later, we were sued over our decision to change the company match formula. Because we had chosen the policy with the broader definition, our defense was covered. The specific wording of the policy proved to be far more important than the initial premium.
Does Fiduciary Insurance Cover DOL Investigations or Penalties? Sometimes.
The Letter from the Government and the Insurer’s Response
Our company received a scary-looking letter from the Department of Labor (DOL) announcing they were launching an investigation into our 401(k) plan’s administration. We immediately notified our Fiduciary Liability insurer. The policy was fantastic—it paid over $50,000 in legal fees for the specialized attorneys who represented us during the investigation. When the DOL later imposed a small penalty, however, the policy could not pay for the penalty itself. It was a clear demonstration that the policy is great for defense costs, but often won’t pay for government fines.
Filing a Fiduciary Liability Claim: Complex Litigation Often Involved
This Isn’t a Slip-and-Fall; It’s a Financial Lawsuit
When our company was sued over our 401(k) plan, I quickly realized this was different from any other insurance claim. This wasn’t a simple accident; it was a complex financial lawsuit involving mountains of data, expert witnesses, and specialized ERISA lawyers. Our Fiduciary Liability insurer was a crucial partner. They had a pre-approved panel of the best ERISA defense attorneys in the country. They managed the litigation strategy and understood the nuances of these cases, which was a level of expertise we could never have handled on our own.
My Company Was Sued by Employees Over Plan Changes: Fiduciary Insurance Response
The Day Our “Better” Health Plan Backfired
In an effort to save money, our company switched to a new health insurance plan with a higher deductible. We thought it was a prudent business decision. A group of employees disagreed and filed a lawsuit, claiming the change was a breach of our fiduciary duty to provide comparable benefits. It felt like a frivolous claim, but we still had to defend it. Our Fiduciary Liability policy responded immediately, appointing a law firm to handle the case. It showed how even a well-intentioned change can lead to litigation.
Protecting Plan Trustees and Committee Members Personally
The Insurance That Lets People Volunteer
Our company was looking for employees to volunteer for our retirement plan committee. Nobody wanted to do it. They were worried about the personal liability risk. I was able to reassure them by showing them our Fiduciary Liability insurance policy. I pointed to the clause that showed the policy protects the personal assets of all past and present trustees and committee members. That assurance was the only thing that gave our employees the peace of mind they needed to step up and serve.
What Fiduciary Liability DOESN’T Cover (Fraudulent Acts? Benefit Payments Themselves?)
The Line Between a Mistake and a Crime
Our Fiduciary Liability policy is a shield, but it’s not invincible. I learned it doesn’t cover everything. For example, if a plan trustee intentionally stole money from the 401(k) plan, that’s a criminal act, not a breach of duty, and it would be excluded. Similarly, the policy won’t pay for the actual benefits owed to an employee. If we are ordered to pay a $100,000 medical claim we wrongly denied, the policy will pay our legal defense costs, but we are still responsible for paying the benefit itself.
Integrating Fiduciary Liability with EPLI and D&O Coverage
The Three-Legged Stool of Management Liability
As a manager, I’m exposed to three main types of lawsuits. If an employee sues me for harassment, my Employment Practices Liability (EPLI) policy responds. If a shareholder sues me for a bad business decision, my Directors & Officers (D&O) policy responds. And if an employee sues me for mismanaging the 401(k) plan, my Fiduciary Liability policy responds. These three policies form a critical three-legged stool of protection for a company’s leadership team, each one covering a unique set of management-related risks.
The Increasing Scrutiny on 401(k) Fees and Fiduciary Responsibility
The Lawsuits Are Coming for Everyone
A decade ago, only the largest corporations got sued over their 401(k) plans. Now, law firms are actively targeting small and mid-sized businesses. They use software to analyze public filings and identify plans with higher-than-average fees. It’s become a cottage industry. My agent told me that having a 401(k) plan without Fiduciary Liability insurance today is like driving a car without liability insurance. The risk of getting sued is no longer a question of “if,” but “when.”
Fiduciary Liability Insurance: Essential Protection for Benefit Plan Sponsors
The Shield for Doing Good
Offering great benefits like a 401(k) or health insurance is one of the best things a company can do for its employees. It’s an act of goodwill. But that goodwill creates enormous legal and financial risk for the people who manage those plans. Fiduciary Liability insurance is the essential shield that protects those good intentions. It allows a company to offer fantastic benefits without forcing its leaders to put their own personal finances on the line. It’s the policy that makes it safe to do the right thing.