Certified Plan Sponsor Professional (CPSP) Practice Exam

True or False: Fiduciary liability insurance is a practical way for plan sponsors to mitigate risks of fiduciary breaches.

1. True

2. False

3. Only in certain cases

4. Not advisable

The correct answer is: True

Fiduciary liability insurance is designed to protect plan sponsors from financial losses arising from claims of breaches of fiduciary duty. This type of insurance mitigates risks associated with fiduciary breaches, which can arise from various actions taken in relation to managing employee benefit plans. Since fiduciaries have specific legal responsibilities under the Employee Retirement Income Security Act (ERISA), the insurance provides a safeguard against potential lawsuits or claims related to those duties. By securing fiduciary liability insurance, plan sponsors can alleviate some of the financial burden that may result from litigation or settlements related to alleged breaches. This allows organizations to focus on their primary responsibilities without the constant anxiety of financial repercussions tied to potential fiduciary failures. While the other choices propose different views, they do not capture the essential role that fiduciary liability insurance plays in risk mitigation for plan sponsors. In essence, employing this type of insurance is a prudent strategy for managing potential fiduciary risks.