What Fiduciary Bond Is All About:
Offering advice to a client may seem like an innocent thing to do, but it’s important to make sure there is no conflict of interest.
Mistakes happen, but they can often result in ugly legal battles that can be stretched out for years. For smaller companies, they’re the sort of lawsuits that can wipe out a business.
We want you to meet Fiduciary Bond Insurance. The coverage that helps you ensure that loose lips won’t sink your ship.
Read on to understand if this insurance coverage is right for you.
What Is Fiduciary Bond?
This insurance coverage protects a policyholder in the event that they are sued for any errors or oversights. Fiduciaries are any professional who is responsible for the benefits (including pension plans) of a group. This can include financial advisors and legal counsel.
Fiduciary liability insurance is often compared to medical malpractice insurance for doctors. In much the same way that those policies protect doctors from their own error and mistakes, this type of insurance can protect lawyers and finance professionals from mistakes made with bandit plans and pension funds. Most of the time, these mistakes tend to deal with conflicts of interest.
Small businesses and large corporations that are offering benefit plans to their employees, as well as the administrators who are in charge of overseeing these plans, need to have this coverage.
Do I Need Fiduciary Bond Insurance?
Any administrator or trustee of an employee benefits or pension plan is legally required to hold this type of insurance. This is coverage that protects the employees or clients of a particular investment or benefit plan, however, not the administration. Fiduciary liability insurance is not legally required, but it is a good investment.
Individuals and companies who need Fiduciary Bond Insurance typically include:
- Plan administrators
- Financial advisors
- Investment advisors
This is insurance that is typically held by a company or an individual who is involved with administering employee benefits. While this insurance is rarely required by law, it is a good idea to protect yourself or your business. Fiduciary liability lawsuits are often difficult to prove. Unlike other crimes, investigating these cases requires interviewing dozens of employees and consultants and pouring through thousands of pages of legal documents.
Even with that work, these cases can be hard to prove and defend against. According to federal law, fiduciaries can be held liable for actions, such as not ensuring enough diversity in an investment plan or imprudent advisement. Those are broad terms that can be used to define a number of actions. That often means that these cases, and their accompanying legal fees, can drag on for years and require multiple paid witnesses. Fighting just one of these cases can wipe out a small business or individual. For that reason alone, this type of insurance is practically a requirement for businesses that don’t have a legal team on staff.
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What Does a Fiduciary Bond Cover?
At a High Level...
Fiduciary Bond Insurance provides funds to cover the result of mistakes made in the administration and/or investment of employee benefits and pensions. The funds in these bonds only go to the people who have money invested in a plan. They do not pay the legal or liability expenses of the fiduciary.
Fiduciary Liability Insurance is meant to provide protection to professionals who have made mistakes in the administration of employee benefits. This includes not signing up employees for benefits, dishonesty, and other errors. Typically, these policies cover both legal fees and the award or settlement that comes from these cases
Getting Into the Details...
In the event that a policyholder is sued, this insurance will either pay for legal counsel or provide legal counsel. In the former, a policyholder would be on their own to find legal representation. This insurance would provide a set amount of money towards the lawyer’s fees or pay him or her directly. In the latter case, the insurance company would provide legal counsel to the policyholder; typically with a lawyer who is an employee of the insurance company. These lawyers often have a lot of experience with these types of cases, and are very motivated to keep awards and settlement amounts as low as possible.
In the event that a case is lost or a settlement is reached, Fiduciary Bond Insurance will pay a set amount towards the award amount. This amount is based on the term limits of the policy.
|Type of Claim||Description||Example|
|Fiduciary error||An investment error made by trustees of the account||Choosing an investment that was not in line with the needs of the employees.|
|Administrative Error||Mistakes made by administrative personnel||Failing to file an employee's paperwork.|
|Conflict of interest||Investments made to benefit the company instead of the investor||Excessive funds invested in companies owned by the advisor's firm.|
|Failure to fund||Not funding investor accounts||Pocketing money instead of placing funds into agreed-upon investments|
You'll Know It's the Right Policy If It Covers:
- Administrative errors
- Investment errors
- Paperwork errors
- Conflicts of interest
What Does a Fiduciary Bond Not Cover?
Fiduciary bonds do not provide any funding to the administer of a benefit plan. It may be helpful to think of fiduciary bonds as the minimal required car insurance. In the event of an accident, only the victims receive any funds. The policyholder receives nothing to help with his or her expenses from the accident. With fiduciary bonds, the policyholder is on their own to cover their legal costs and any other costs that are associated with the case.
It does not cover:
- Imprudent investment
- Legal fees
- Administrative costs relating to the insured
- Professional misconduct
- Criminal charges
To make up for this gap, fiduciary liability insurance is offered. A liability policy can provide funds for legal representation, as well as funds towards any liability settlement or award granted to the plaintiff.
Liability policies can be written to exclude a number of different situations, but the most common is cases of imprudent investment. A different type of insurance policy must be purchased to cover these cases.Typically, however, the investment firm hired to handle the pension investments will carry this coverage.
What Are the "Limits" on a Fiduciary Bond?
Fiduciary Bond Insurance or ERISA bonds are required by law. The amount of the bonding, therefore, is also set by federal law. According to ERISA, “A plan official must be bonded for at least 10 percent of the amount of funds he or she handles, subject to a minimum bond amount of $1,000 per plan with respect to which the plan official has handling functions.”
This typically means that individuals have a required bond amount of $500,000 per plan. Starting in 2008, however, federal law changed so that plan officials (typically the company administering the plan) now need to carry a minimum of $1,000,000 in coverage. Of course, individuals and businesses may choose to carry additional coverage if they wish.
Fiduciary liability insurance has no such requirements.The limits of these policies, therefore, are determined by the wording of the policies themselves. Often, liability coverage comes with two limits. The first is an individual limit that applies to each separate case that is brought against a policyholder. The second limit is a lifetime limit; the total amount that a policy will pay towards all claims. It’s important to note that the time limit on the second amount is set by the policy. It’s usually set for one year, the “lifetime” of the policy, not the policyholder.
How Much Does a Fiduciary Bond Cost?
ERISA bond insurance typically is priced based on the amount of assets controlled by a plan and the perceived risk by the insurance company. Typically, these bonds cost less than $200 a year for policyholders.
Fiduciary Liability Insurance is more complicated, because more factors are considered including the size and type of benefits offered and the number of employees that the plan is administered to.