The ERISA-mandated Fidelity Bond is not the same thing as Fiduciary Insurance

Sheri A. Creger, CPFA  Ι October 9, 2018

As a fiduciary, it is your role to understand the difference between an ERISA Fidelity Bond and Fidelity Insurance and what and who is covered. If you do not understand this, you expose yourself and all fiduciaries to the plan to potential liability.

ERISA Fidelity Bond

The ERISA fidelity bond protects the plan, not the fiduciary from losses caused by fraud, dishonesty, misappropriation or embezzlement on the part of the plan official/fiduciaries. ERISA requires that every fiduciary of an employee benefit plan be bonded unless an exemption is available. This includes every administrator, officer and employee with the authority to send in deposits, request benefits to be paid out or transfer plan funds. The bond must be issued by a Corporate Surety Company that issues Federal Bonds under the authority granted by the Secretary of the Treasure.

Fidelity Bond Basics

Plan Officials handling qualifying assets must be bonded for at least 10% of the amount of plan assets handled, with a minimum bond limit of $1,000 and maximum bond limit of $500,000. Plans that hold employer securities (ESOP) require a maximum bond limit of $1,000,000. Non-qualifying assets require 100% bonding.

In addition:

  • the plan fiduciaries cannot have any control or interest in the surety or reinsurer;
  • the bond must cover criminal losses (as described under ERISA); and
  • the bond cannot have a deductible.

The employer is required to furnish information regarding this bond on its Form 5500. Without a fidelity bond in place, the fiduciary will be made to come out of pocket for any plan losses.

Fiduciary Insurance

Not like the mandated ERISA fidelity bond, fiduciary insurance is optional. Fiduciary insurance personally protects the fiduciary. Fiduciary Liability Insurance pays on behalf of the insured, the legal liability arising from claims from alleged failure to prudently act within the meaning of the Pension Reform Act of 1974. A plan fiduciary may not understand and I often find that they don’t realize that he/she can get sued personally or the extent of their personal assets at risk. 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.

Something to Consider

Sometimes employers think their “errors and omissions” or “directors’ and officers’ coverage will satisfy the ERISA fidelity bond requirement. You must read your coverages closely and understand what they cover. E&O or D&O insurance is not the same as a fidelity bond and those policies exclude fiduciary liability exposure as well as those exposures pertaining to the Employee Retirement Income Security Act.  Again, you must understand what polices you have/need and what is covered and not covered.  As a fiduciary it is your job to ensure you have a large enough bond to protect your retirement plan and not leave yourself and your fiduciaries exposed to possible liability.

BFF® can help! Let us review your policies/coverage and help you determine if your are properly covered.