Fiduciary Liability Insurance: What It Covers

If your company offers things like 401(k) plans or health insurance, you could be legally responsible for how those benefits are handled. That’s why fiduciary liability insurance exists. It protects business owners and managers from being sued if there’s a mistake with employee benefit plans.

This type of insurance is especially important for small business owners, HR managers, or anyone helping manage retirement plans or employee benefits. In this guide, we’ll explain what fiduciary insurance covers, why it matters, and how it protects your business.

Fiduciary Liability Insurance: What It Covers

What Does “Fiduciary” Mean?

A fiduciary is someone who manages money or benefits for others. If you’re helping choose investment options, handle employee benefits, or work with retirement plans, you’re likely a fiduciary under the law—even if it’s not in your job title.

Being a fiduciary means you must act in the best interest of your employees. If you don’t, you can be held personally responsible. That’s where fiduciary liability insurance can help.

What Is Fiduciary Liability Insurance?

Fiduciary liability insurance helps cover your costs if you’re sued over a mistake with a retirement plan or employee benefits. It protects your business and your team from claims of mismanagement, even if the mistake was unintentional.

Common reasons people get sued include:

• Picking expensive or poor-performing 401(k) plans

• Giving the wrong info about benefits

• Mishandling employee contributions

• Forgetting to enroll or remove someone from a benefit plan

Without insurance, your business could be forced to pay legal fees, settlements, or penalties out of pocket.

What Does the Insurance Cover?

Most fiduciary liability policies cover:

• Legal fees if you’re sued

• Settlements or court judgments

• Mistakes made when managing employee benefits

• Claims about mismanaging health or retirement plans

Some policies may also cover penalties under federal laws like ERISA, which sets rules for retirement plans.

What’s Not Covered?

This insurance won’t protect you if:

• You commit fraud or a crime

• You break the law on purpose

• You make simple clerical errors (a different policy covers that)

  
  

Who Needs This Insurance?

Any company that offers employee benefits—big or small—should think about getting fiduciary insurance. This includes:

• Small businesses

• Nonprofits

• Schools

• Healthcare providers

• Large corporations

Even if you use a third-party provider for your benefit plans, your company is still responsible if something goes wrong.

How Is This Different from Other Insurance?

Many people think their general liability, directors and officers (D&O), or errors and omissions (E&O) insurance will protect them in these cases. It usually won’t.

And while ERISA requires a fidelity bond, that only covers theft—not lawsuits or legal claims. Fiduciary liability insurance fills the gap.

How Much Does It Cost?

The cost depends on:

• How big your business is

• How many employees you have

• How much money is in your benefit plans

• How much coverage you want

Most small businesses pay $500 to $2,500 per year for a policy. It’s a small price to pay to avoid big legal bills later.

How to Lower Your Risk

Getting insurance is smart, but you should also follow good practices to avoid lawsuits:

• Keep clear records of all decisions

• Review your benefit plans every year

• Compare plan fees and performance often

• Train your team on benefit rules

• Work with trusted outside providers

If you’re not sure what to do, talk to a financial advisor or insurance expert.

Why 2025 Is an Important Year

In 2025, the lifetime gift and estate tax exemption is still high—but it may drop in 2026. That’s making some businesses rethink their financial plans. It’s also a reminder to look at your insurance coverage before the rules change.

Final Thoughts

Fiduciary liability insurance protects your business if something goes wrong with employee benefits. Even the best companies can make mistakes. And when they do, lawsuits are expensive.

If you offer retirement plans, health benefits, or other employee perks, don’t take chances. Talk to an insurance advisor and make sure you’re covered.

It’s not just smart—it’s the responsible thing to do.

Looking for guidance on how to align your financial plan with your ideal retirement location? Connect with a trusted advisor today and take the first step toward building a secure, personalized retirement strategy.