The ERISA-mandated fidelity bond is NOT the same thing as fiduciary insurance.
ERISA FIDELITY BOND. The ERISA fidelity bond protects the plan (not the fiduciary) from losses caused by fraud, dishonesty, misappropriation, or embezzlement (which this author has witnessed one too many times) by persons who work with 401(k), 403(b), and other retirement plans and funded welfare plans. ERISA requires that anyone who “handles funds or other property” of an ERISA plan be bonded unless an exemption is available. In fact, ERISA prohibits any person to “receive, handle, disburse, or otherwise exercise custody or control of plan funds or property” without being properly bonded.
- The bond must have a minimum payout equal to at least 10% of the plan assets. A plan with non-qualifying assets (such as real estate and limited partnerships) that exceed 5% of the total plan assets are required to carry a bond that covers 100% of the value of the assets in the plan.
- The employer must obtain the a fidelity bond only from a Department of Treasury-approved surety or reinsurer.
- The plan fiduciaries cannot have any control or interest in th surety or reinsurer.
- The bond must cover criminal losses (as described under ERISA).
- The bond cannot have a deductible.
With this mandated bond (which the Department of Labor annually asks a plan sponsor to confirm on its Form 5500: "was the plan covered by a fidelity bond?"), the plan or its trust is the insured. Without a fidelity bond in place, the fiduciary will be made to come out of pocket for any plan losses.
FIDUCIARY INSURANCE. In contrast to the mandated ERISA fidelity bond, fiduciary insurance is optional. A plan fiduciary may forget that he/she can get sued personally. Moreover, plaintiffs lawyers can try to recover specifically from each and every fiduciary to a plan (jointly and severally) for breaches of their duties to oversee the ERISA retirement plan. Personal assets (e.g., house and savings) of a fiduciary will be at risk. Whereas with a fidelity bond the plan is the insured, with fidelity insurance, the fiduciary is personally insured.
LISTEN TO US VLOG. Listen here to my colleague and partner Sarah Ivy discuss the failure in not understanding the distinction between the ERISA-required fidelity bond vs. fiduciary insurance, identified as #10 Worst Mistake that employers make when running their 401(k), 403(b), and other retirement plans. This is the first of 10 vlogs wherein Sarah and I will discuss mistakes plan advisors routinely find among their clients (we will vlog every other week with this countdown).
ONE FINAL NOTE. Sometimes employers think their "errors and omissions" or "directors and officers" coverage will satisfy the ERISA fidelity bond requirement. Examine those coverages closely. E&O or D&O insurance is not the same as a fidelity bond. Moreover, those E&O and D&O policies do not provide personal protection to the ERISA fiduciary as fiduciary insurance would. -- JLE, AllThingsERISA