Fiduciary Liability Insurance Pricing Driven by Investment Fees, Plan Governance

Understanding the factors that drive the pricing of fiduciary liability insurance can help plan sponsors identify what is most important when managing their fiduciary risk.

Aon, in a recent survey, found that the main drivers of fiduciary liability insurance pricing include: fee levels; the quality of plan committee minutes; and investment adviser and outsourced chief investment officer mandates.

In the survey, Aon analyzed the 15 largest insurance companies that provide fiduciary liability insurance coverage to understand how plan management typically impacts pricing.

About 80% of insurance companies surveyed said conducting periodic plan administration fee benchmarking reviews conducted by a plan’s investment committee makes a significant impact on the pricing of fiduciary liability insurance. For defined contribution plans, 70% said an investment menu that included mutual funds using retail share classes would be a significant driver of premiums, and 40% said plans using mutual funds generating revenue sharing were a significant driver of insurance premiums.

In addition to a plan sponsor’s process of reviewing fees and fee structures, maintaining detailed committee meeting minutes is important to insurance pricing. Aon found 60% of insurance companies reported that whether a committee takes formal minutes could have a significant impact on pricing. But it does not necessarily matter who takes the minutes, because when asked about the impact of engaging an outside adviser or legal counsel to take minutes, only 10% said it would have a significant impact.

Having an investment adviser on retainer had a moderate impact on pricing, as about half of survey respondents reported that it was a significant influencer, up from 38% in Aon’s 2021 survey. Additionally, whether plan sponsors use an ERISA 3(38) OCIO was viewed as having a significant impact on pricing by 50% of insurance companies.

Overall, Aon found that there is an increasing acceptance of OCIO mandates to reduce a plan sponsor’s exposure to fiduciary liability.

Some insurance companies provided comments in the survey, in addition to responding to questions. One company representative stated that working with reputable firms is important, but the company does not “rank” the various firms. Many respondents said using qualified outside consultants is critical and that a plan that uses no outside investment professional is likely to be unable to purchase fiduciary liability insurance.

In addition, 80% of respondents viewed having employer stock in a defined contribution plan with no cap on investment limits as a driver of higher premium pricing. This figure dropped to 50% when there is a limit on the size of such investments. Given the history of lawsuits related to company stock, Aon found that this was not surprising to hear from insurance companies.

Aon’s survey also included questions about the factors that drive pricing for plan sponsors using pooled employer plans. The five factors that insurance companies said most significantly impact pricing for PEPs were: having company stock; the size of the DC plan assets being transferred to the PEP; the total plan assets held by the PEP; the firm serving as the pooled plan provider; and the employer’s decision to join the PEP.

Some insurance firms reported preferring to work with a more established firm, as opposed to new entrants, while others said that because the Department of Labor has yet to issue fiduciary guidance on PEPs, their firms are still evaluating the potential exposure presented.

Aon conducted its survey between August and October 2024.