Why fiduciary liability insurance is necessary as PE enters the 401(k) space

The retirement planning ecosystem is undergoing significant shifts, from demographic changes and concerns of an aging population to economic instability. These converging factors cast a light on the delicate nature of long-term financial planning.

But the waves of changes continue, and the latest flutter thrown into the mix is the push for private equity investments in 401(k)s. Just a few months ago, Empower announced its plan for private markets to be included within defined contribution plans. Since then, the conversations around private markets in retirements plans have spiraled and expanded with other major players such as BlackRock declaring their intention to offer a 401(k) target-date retirement fund that includes private investments in 2026. Additionally, PE investments have moved up as a priority list for the current administration, most notably President Donald Trump’s signing of an executive order designed to help make private-market investments more available to U.S. retirement plans.

PE in retirement planning may not be new, but it certainly has been accelerated and rushed to the top of the radar for many retirement savers looking for new opportunities for their money. However, all that glitters may not be gold, and the risks associated with private markets can be significant due to their higher fees, liquidity strains and less established nature.

Retirement savers are not the only ones who face risks with this asset class. The growing movement adds complexity and liability to employers managing retirement plans. These employers, also known as plan sponsors, face increased fiduciary responsibilities. With new investment options or plan features to manage, the margin for error continues to grow. This latest development reiterates the importance for these plan sponsors to have a rigorous risk management process in place to avoid a potential fiduciary breach if any missteps occur. This is where the role of fiduciary liability insurance comes into play.

Private markets’ rewards and risks

Private markets previously had been available only for institutions or ultra-high net worth individuals. With the retailization of private markets in full steam, retail investors are eager and hopeful to get a slice of the pie. Private equity funds have enjoyed a good track record for the last couple of years, outperforming the stock market. A survey earlier this year by the NAPA Advisor Research Institute, a research arm of the National Association of Plan Advisors, found broad agreement among advisors on the benefits of private market investments, including diversification (cited by 67% of advisors as important), the potential for increased investment returns (50%), and the potential to reduce volatility (64%).

Although this asset class may present high rewards, it is accompanied by high risks. Unlike public markets, regulations and reporting requirements in the PE space are limited. Additionally, private market investments are not straightforward. The lack of reporting means there is a lack of transparency, making investing a tad speculative. Earlier this year, Sen. Elizabeth Warren, D-Mass., made headlines with an open letter to Empower, asking the retirement plan service provider to explain how it intends to protect 401(k) plan participants from the risks associated with investing in private markets.

The risk and rewards of private markets may be polarizing, but one thing is certain – plan sponsors face unprecedented pressures with this private market investments. Plan sponsors are required by the Employee Retirement Income Security Act to act in the best interests of plan participants. This includes monitoring and managing investment options, controlling costs, and ensuring participants are educated to make informed decisions. With private markets thrown into the mix, it makes these obligations more challenging. Plan sponsors must evaluate private market investments, provide clear communications to plan participant on fees and disclose accordingly, and monitor for options that fit participants’ needs.

The administrative burden also increases as plan sponsors must provide detailed and ongoing disclosures about the costs, structure and risks of private market investments as well as continuously oversee private market funds. It will also require intensive recordkeeping and ensuring meeting compliance requirements.

With so many items to juggle, an error can snowball and lead to an alleged fiduciary breach, damaging both financially and reputationally to an employer. In fact, it was recorded that in 2024, there were 136 ERISA-related lawsuits, with varying reasons, including excessive fees and forfeiture-related claims. Injecting PE investments will more likely than not result in legal exposure. Plan sponsors must remain vigilant in ensuring they have the proper guardrails in place to avoid the risk of lawsuits.

Don’t just bond—insure

“By failing to prepare you are failing to plan” – this common saying rings true for plan sponsors. Due to the increased severity of investment risks, a rigorous risk management plan will prove instrumental for plan sponsors to help them navigate these changes and avoid a costly breach of fiduciary responsibility. Insurance will be an important tool in a plan sponsor’s toolbox and can ultimately be a game changer.

Although ERISA requires plan sponsors to carry an ERISA bond, it’s important to understand that this coverage only protects against fraud and dishonesty. To truly safeguard against the broader risks fiduciaries face—especially amid rising litigation—fiduciary liability insurance should be a top priority.

Fiduciary liability insurance is typically available in $1 million increments and provides critical protection against claims of mismanagement or poor judgment related to employee benefit plans. It also covers legal defense costs and potential settlements. Although some may hesitate to obtain coverage due to its perceived expense, both the mandatory ERISA bond and optional fiduciary liability insurance are modest investments compared to the mounting costs of regulatory fines or lawsuits from the Department of Labor.

It’s important to make the distinction that fiduciary liability insurance is the best insurance protection for plan sponsors, as almost all directors and officers liability insurance has specific exclusionary language for any liability assumed under the ERISA.

To further reduce exposure, organizations should also modernize their compliance efforts by leveraging technology. Tools that automate updates to ERISA provisions, track vesting schedules and monitor contributions can significantly cut down on human error, which is often the leading cause of fiduciary breaches. Digital solutions can also generate audit-ready reports, offering clear evidence that fiduciary responsibilities are being properly met.

Plan smart, protect early against fiduciary liability

The changes to retirement accounts do not seem to be slowing down anytime soon, so it is imperative that plan sponsors know the insurance tools available to them to protect them from any risks brought on by a fiduciary breach. Proactively addressing emerging complexities is essential to ensuring long-term success for plan sponsors.

 

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