As a small business owner, understanding the importance of fiduciary and fidelity insurance is crucial in today’s complex regulatory environment. With the increasing scrutiny on employee benefit plans and the rising risks of internal fraud, these insurance policies serve as vital safeguards for your company’s financial health and reputation.
Whether you’re managing a retirement plan or simply want to protect your assets from employee dishonesty, fiduciary and fidelity insurance offer the peace of mind you need to focus on growth. In this blog, we break down these essential coverages and why they matter for your business.
Fiduciary Insurance
Fiduciary insurance is a specialized form of liability coverage designed to protect individuals and organizations who manage employee benefit plans. Under the Employee Retirement Income Security Act (ERISA) of 1974, fiduciaries can be held personally liable for losses to a benefit plan that incurred as a result of their alleged errors, omissions or breach of their fiduciary rates.
This coverage protects you and your business against various claims, including improper advice or disclosure, inappropriate selection of advisors or service providers and imprudent investments. Fiduciary also covers issues related to lack of investment diversity, breach of ERISA-imposed responsibilities, negligent plan admin and investment-related conflicts of interest.
There are two other types of coverage related to fiduciary liability insurance:
- ERISA Bonding: Legally required insurance against dishonest situations. When dishonest administrators or trustees have financially harmed and employee benefit plan, these bonds may be used, but only for the benefit of the plan and its beneficiaries.
- Employee Benefit Liability Insurance: Covers claims from errors in benefit plan administration, such as enrollment mistakes or improper advice.
It’s crucial to note that fiduciary insurance is not required by ERISA but is highly recommended to protect personal assets. Many fiduciaries believe incorrectly that their ERISA fidelity bond protects their personal assets.
Fidelity Insurance
Fidelity insurance, also known as crime coverage, protects your business from losses due to employee dishonesty or fraud. It’s essential for your business protection strategy, and helps you meet the ERISA requirement to insure at least 10% of your plan’s assets. Fidelity also provides broad coverage for losses from dishonest acts by employees, whether acting alone or in collusion with others.
The difference between crime coverage and fiduciary coverage is that a crime policy insures against dishonesty — not suits arising out of ERISA.
Best Practices for Small Businesses
To mitigate risks associated with fiduciary responsibilities, small businesses should consider the following practices:
- Seek expert advice when managing benefit plans.
- Choose a range of financially sound investments to diversify and mitigate risk.
- Provide regular training to ensure all fiduciaries understand their responsibilities under ERISA.
- Maintain clear records of all decisions and processes related to benefit plans.
While proper management can reduce risk, it can’t eliminate personal liability entirely. For more information on how to protect your small business with fiduciary or fidelity insurance, contact UNICO Group to get started.
