Certified Plan Sponsor Professional (CPSP) Practice Exam

Does fiduciary liability insurance help plan sponsors manage risks associated with monetary penalties?

1. Yes, it provides protection

2. No, it has no effect

3. Only in the case of fraudulent activities

4. It is not a common practice

The correct answer is: Yes, it provides protection

Fiduciary liability insurance is designed to protect plan sponsors from potential losses arising from breaches of fiduciary duty. When plan sponsors manage retirement plans, they have a legal obligation to act in the best interests of plan participants. If they fail to meet this obligation, they can face legal claims that may result in monetary penalties. The coverage provided by fiduciary liability insurance specifically helps plan sponsors manage risks associated with these monetary penalties. It typically covers the costs associated with defending against claims as well as any settlements or judgments related to breaches of fiduciary duty. This means that if a plan sponsor is held liable for a breach and faces financial penalties, the insurance can help cover those expenses, significantly reducing their financial risk. In contrast, the other options do not accurately reflect the purpose and effect of fiduciary liability insurance. It is a recognized tool in the industry that actively provides protection against certain types of risks associated with fiduciary responsibilities, rather than being ineffective or limited to specific fraudulent activities or simply uncommon.