As a business owner, you know the importance of offering a strong benefits package to your employees. Not only does it result in higher retention rates, but it’s a great way to attract potential talent. It’s an investment most employers proudly showcase during the hiring process, as it boosts morale and productivity among staff members. However, benefit plans come with their own set of risks and liabilities. 

Luckily, there’s insurance coverage for the many types of business risks you may encounter.. Two such policies, ERISA fidelity coverage and fiduciary liability insurance, are often confused with each other. While they share some similarities, the difference between ERISA bonds and fiduciary coverage is important for business owners to understand. This article provides a breakdown of how these coverages work  and the ways in which they differ.

ERISA & Employee Benefits Plans

The Employee Retirement Income Security Act of 1974 (ERISA) is a federal law that protects employee benefits plan participants from mismanagement, fraud, and dishonesty. Under this law, employee benefits plans refer to employer-sponsored retirement, pension, or health programs.

Private business owners that offer employee benefits plans are required under ERISA to obtain a specific type of insurance coverage referred to as an ERISA fidelity bond ERISA fidelity bonds insure the plan against losses from fraud, theft, or other dishonest acts.

For example, if an administrator embezzles from the company’s retirement funds, under ERISA, plan participants are insured and won’t lose the funds they saved in the plan. The ERISA fidelity bond is in place to cover the financial loss employees would otherwise experience in that situation. 

ERISA fidelity insurance is generally obtained through a surety or reinsurer listed under the Department of Treasury. According to the Department of Labor (DOL), employers must cover at least 10 percent of the plan’s total assets, but many decide to increase their bonds for more coverage. 

Importantly, while the fidelity bond protects the benefits plan, it does not cover the fiduciaries responsible for overseeing the plan. Below, we discuss the liabilities of fiduciaries and the coverages they may seek to reduce their personal risks.

Fiduciaries and Fiduciary Liability Insurance

If you’re a private business owner and your company offers an employee benefits plan, you’re most likely considered a fiduciary.  Per the DOL, any person who exercises authority over benefits plan management, provides investment advice, or is responsible for plan administration is a fiduciary. This tends to include plan administrators, trustees, sponsors, and members of investment committees. 

Fiduciaries are required to act in the best interest of your plan participants and to protect plan assets. While this may be your intent, there can sometimes be errors, mismanagement, or neglect. When this occurs, the fiduciary may face personal liabilities.

Fiduciary liability insurance covers you, your company, and any employee acting as a fiduciary. It protects against many claims, including but not limited to:

• errors and omissions when administering benefits
• irresponsible or negligent retirement plan investment practices (including scenarios like failure to offer adequate diversification options, charging excessive fees, or acting in a way that presents a conflict of interest)
• wrongful denial of employee benefits
• failure to monitor third-party service providers

Importantly, fiduciary liability insurance will generally not cover any illegal activity or intentional wrongdoing by the fiduciary. It also generally does not cover plan administration wrongdoing on behalf of any third-party service providers.

Unlike ERISA fidelity bonds, which are required by the DOL to protect plan participants and employees, fiduciary liability insurance is not required by law. Fiduciaries and business owners, however, should strongly consider coverage in light of the liabilities associated with overseeing benefits plans.

Main Differences: Fiduciary Insurance vs. ERISA Fidelity Bonds

As described above, the main difference between ERISA bond and fiduciary coverage is what each insures. Whereas the ERISA fidelity bond protects the participants in the plan, the fiduciary liability insurance covers the business owners and individuals operating that plan.

In addition to this primary distinction, some additional differences between these types of insurance include:

• Requirements to hold coverage: ERISA bonds are required by law, but fiduciary liability insurance isn’t.
  
• Where to purchase coverage: Fiduciary liability policies can be purchased through many insurance carriers, such as Counterpart, whereas fidelity bonds must be obtained through sureties or reinsurers listed by the Department of Treasury. 
  
• Coverage amount: Since fiduciary liability insurance is optional, the coverage amount is flexible; ERISA fidelity bonds, on the other hand, must cover no less than 10 percent of plan assets.

Final Thoughts

As you can see, there are meaningful differences between ERISA bonds and fiduciary liability insurance. Both serve to protect different stakeholders of benefits plans, but together they can help to protect your company, fiduciaries, and employees. 

Private businesses have experienced an unprecedented number of ERISA-related lawsuits in recent years. As you consider the need for fiduciary liability insurance, remember that the ERISA Fidelity bonds protect the plan, not the people responsible for administering that plan. Work with a broker to create a cost-effective plan that safeguards your company’s fiduciaries and fits your specific needs.