According to the U.S. Department of Labor, fiduciaries overseeing retirement plans are personally liable for losses resulting from breaches of duty under ERISA. That means even well-intentioned executives and HR professionals can face lawsuits if a plan is mismanaged, fees are excessive, or disclosures are incomplete. Fiduciary liability insurance exists to address this risk—but it’s often misunderstood or confused with other protections.

This article explains what fiduciary liability insurance is, how it differs from other policies, real-world scenarios where it matters, and what organizations should consider when evaluating coverage.

Key Takeaways

• Fiduciary liability insurance covers claims of mismanagement of employee benefit plans, including legal defense costs and settlements.
• It differs from ERISA fidelity bonds (which protect against theft) and directors & officers (D&O) coverage (which doesn’t usually extend to benefit plan duties).
• Common triggers include 401(k) fee disputes, errors in plan administration, and failure to disclose investment risks.
• Policies often exclude intentional fraud, criminal acts, or prior known breaches.
• Having fiduciary liability insurance is a central piece of risk management for organizations managing employee retirement or health plans.

What Is Fiduciary Liability Insurance?

Fiduciary liability insurance is designed to protect individuals and organizations responsible for managing employee benefit plans. Under ERISA, fiduciaries are held to strict standards of prudence and loyalty when handling retirement and health plans. If they fail in those duties—even inadvertently—they may be held personally responsible.

This insurance covers legal defense costs, settlements, and judgments that arise from claims of mismanagement or breach of fiduciary duty. For many organizations, it’s a safeguard that ensures a lawsuit doesn’t threaten both corporate and personal assets.

How It Differs from Other Coverages

It’s easy to confuse fiduciary liability coverage with other types of insurance, but the differences are important:

• ERISA bonds: Required by law, these protect plans against theft or fraud by those handling funds—not against poor decision-making or mismanagement.
• Directors & Officers (D&O) insurance: Protects company leadership from claims related to corporate governance, but usually excludes fiduciary responsibilities for benefit plans.

So what? A company could have D&O coverage and an ERISA bond, yet still be exposed to fiduciary liability risk without this separate insurance.

Hypothetical Scenario Where It Applies

Hypothetical: A mid-sized firm sponsors a 401(k) plan. Employees sue, claiming the plan offered only high-cost funds when lower-cost alternatives were available. Even if the company acted in good faith, the fiduciaries face legal costs to defend against the claim. Fiduciary liability insurance would typically cover the defense and any settlement. 

Other common triggers include:

• Errors in calculating benefits owed to employees.
• Failing to properly diversify plan investments.
• Not disclosing fees or risks in plan documents.
• Delays in transferring employee contributions into retirement accounts.

What’s Covered—and What’s Not

A standard fiduciary liability policy may include:

• Legal defense costs (attorney fees, court costs).
• Settlements or judgments from fiduciary breach claims.
• Regulatory penalties in certain cases, though this depends on the policy.

Exclusions often include:

• Fraud or criminal acts.
• Deliberate noncompliance with regulations.
• Claims arising before the policy period (known issues).

Understanding these boundaries is critical when selecting a policy.

Why It Belongs in a Risk Management Strategy

Fiduciary liability insurance is not just about compliance—it’s about stability. Legal costs in ERISA lawsuits can climb into the millions, threatening both company finances and individual fiduciaries’ personal wealth.

For organizations, this insurance complements broader protections:

• D&O coverage for corporate governance.
• Cyber liability insurance for digital risks.
• General liability insurance for business operations.

Together, they create a more resilient defense against the variety of risks businesses face.

Many fiduciaries assume that having a retirement plan provider or ERISA bond shields them from liability. In reality, responsibility still rests on their shoulders. Fiduciary liability insurance offers a vital layer of protection, ensuring that well-meaning decisions don’t turn into devastating financial consequences.