Fiduciary liability insurance protects companies from lawsuits if they makes errors or fails to act in employees’ best interests. For example, if beneficiaries of a 401 (k) plan accuse administrators of charging excessive fees, the insurance pays the company’s legal-defense costs, settlement, and damages. Here’s how.
In the financial world, a fiduciary ideally works solely for the benefit of their client. Therefore, they shouldn’t seek personal gain or sway their clients into particular products in exchange for payment from companies. There are a number of ways businesses expose themselves to risk of a lawsuit claiming breach of fiduciary duty. They include:
Negligent or poor investment management.
Charging excessive fees.
Inadequate diversification of plan assets.
Having a conflict of interest.
For example, employees sued a large bank for directing 401(k) retirement investments into its own mutual funds. The lawsuit accuses those funds of being overpriced and underperforming.
Fiduciary insurance covers retirement plan-related missteps. It also protects against losses due to errors and mismanagement of other types of employee benefit plans. These may include health insurance, life insurance, profit sharing, disability and employee leave plans.
Businesses may face lawsuits relating to benefit plans for:
Inadequate communication of health plan terms to covered employees.
Failure to tell employees about coverage for medical procedures.
Failing to enroll eligible employees.
Improperly terminating eligible employees.
For example, a plan administrator might neglect to sign a new hire up for the company health plan. If the employee later had an accident or illness resulting in medical costs, the administrator and company could face a lawsuit for not enrolling an eligible worker.