Fidelity bonds are mandated by the Employee Retirement Income Security Act (ERISA) to protect retirement, pension, and other employee benefit plans from fraud, mismanagement, and abuse.
ERISA bonds are not the same as fiduciary liability insurance, which insures fiduciaries (and the plan) against losses caused by breaches of fiduciary responsibilities. Although many fiduciaries do carry fiduciary liability insurance, it is not required by law and does not satisfy the fidelity bonding requirement under ERISA.
What do ERISA bonds protect against?
ERISA bonds protect 401(k) plan participants from “fraud and dishonesty,” such as:
- Embezzlement
- Forgery
- Fraud
- Larceny
- Misappropriation
- Theft
- Willful misapplication
- Wrongful abstraction
- Wrongful conversion
Which 401(k) plan officials need an ERISA bond?
Every person who “handles funds” of an employee benefit plan must be bonded unless otherwise exempted. It is against the law to “receive, handle, disburse, or otherwise exercise custody or control of plan funds” without a proper bond.
Most commonly, bonds are secured by the plan administrator and appointed officers (the employer, joint board, trustees, or employee recordkeeping organization).
The bonding requirement includes employees of the plan and employees of the plan sponsor, as well as any service provider whose duties involve access to plan funds or decision-making authority affecting plan funds.
ERISA bond exemptions
ERISA bonding requirement exemptions include:
- Solo 401(k) plans
- Employee benefit plans that are paid directly out of employer or union assets
- Church or government plans that are not subject to Title I of ERISA.
- Financial institutions, banks, insurers, registered brokers, and dealers, and
- Service providers or fiduciaries who do not handle funds or other property of an employee benefit plan.
How to get an ERISA bond
ERISA bonds must be obtained from a surety that is approved by the Department of Treasury, listed in Department Circular 570. The parties of interest must not have any direct or indirect financial stake in the surety, agent, reinsurer, or broker through which the bond is obtained. Since the purpose of an ERISA bond is to protect a plan, the bond can be purchased using plan assets. Service providers may also purchase their own separate bond insuring plans.
How much ERISA bond coverage is needed?
Generally, each person must be bonded in an amount worth at least 10% of the total plan assets handled in the preceding year or a minimum of $1,000. The Department cannot require plan officials to carry more than $500,000 per plan – unless they hold employer stock or non-qualified assets, in which case the cap increases to $1 million per plan. Bonded parties may also choose to hold a greater bond if they wish to do so.
The minimum bond term is a year, but bonds may cover multiple years with an “inflation guard” provision to ensure automatic ERISA compliance.
What happens if there is insufficient bond coverage?
The IRSDOL monitors the amount of fidelity bond coverage on Form 5500 each year. Failure to carry adequate bonding can trigger a plan audit. A 401(k) fiduciary or sponsor can be held directly liable for losses that should have been covered by an ERISA bond.
Are fidelity bonds expensive?
It is surprisingly cheap and easy to meet ERISA bonding requirements. Blanket bonds covering all employees can be purchased for as little as $100 a year, with many surety companies selling or renewing in a matter of minutes online.
Do you have questions about ERISA bonds?
Ubiquity is a fully bonded third-party administrator for small business 401(k) plans. To explore whether a retirement savings plan is right for your company, we invite you to review our 401(k) resources section. Additionally, we are available to answer any questions you may have about meeting ERISA requirements and protecting the funds in your plan.
