The Employee Retirement Income Security Act of 1974 (ERISA) requires certain individuals who are responsible for the day-to-day administration of a 401(k) plan to be covered by a fidelity bond. The purpose of the bond is to protect 401(k) plan participants against losses caused by acts of fraud or dishonesty.
We get of a lot of questions about ERISA fidelity bonds from 401(k) plan sponsors – who must purchase a bond on behalf of their plan. Below is a FAQ with answers to the most common questions we receive. If you are a 401(k) plan sponsor, you can use our FAQ to understand the basics about your bonding responsibility.
What is an ERISA fidelity bond?
An ERISA fidelity bond is a type of insurance that protects a 401(k) plan from losses caused by acts of fraud or dishonesty (e.g., theft, embezzlement or forgery) by “plan officials.” ERISA fidelity bonds can only be purchased from a surety or reinsurer that’s named on the Department of the Treasury’s Listing of Approved Sureties.
Who are “plan officials?”
A 401(k) plan official is defined as any person who “handles [plan] funds or other property.” A person is deemed to “handle” plan funds or other property when they meet one or more of the following criteria:
- Physical contact with cash, checks or similar property
- Power to transfer funds from the plan to oneself or to a third party
- Power to negotiate plan property (e.g., mortgages, title to land and buildings or securities)
- Disbursement authority or authority to direct disbursement
- Authority to sign checks or other negotiable instruments
- Supervisory or decision-making responsibility over activities that require bonding
What are “funds or other property?”
“Funds or other property” are the assets that a 401(k) plan uses or may use to pay benefits to plan participants or beneficiaries.
Who are the parties to a fidelity bond?
There are three parties to an ERISA fidelity bond – the insured, the insurer, and the covered. The 401(k) plan is the insured, the surety company is the insurer, and the plan official is the covered. As the insured, a 401(k) plan can make a claim on the bond when a loss occurs.
Are all 401(k) plans required to have a bond?
No. Solo 401(k) plans are not subject to the fidelity bond requirement. Neither are retirement plans sponsored by churches or governmental entities.
How much coverage must a bond provide?
Generally, each plan official must be bonded for at least 10% of the funds they handle as of the first day of the plan year, subject to a $1,000 minimum. However, 401(k) plans are not obligated to have more than $500,000 in total coverage. There are two exceptions:
- For plans that hold employer stock, the $500,000 cap is increased to $1,000,000.
- For plans that hold “non-qualifying assets” (e.g., real estate or limited partnerships), the minimum bond amount is the greater of 1) 10% of plan assets or 2) 100% of the value of the non-qualifying assets.
A 401(k) plan can purchase more coverage, but it’s not required. Further, an ERISA fidelity bond can’t have a deductible - in other words, it must cover the first dollar of a loss.
What’s the minimum term of a bond?
A fidelity bond’s term can’t be less than one year. However, it can be longer. Bonds that cover multiple years typically contain an “inflation guard” provision – so the plan’s coverage amount automatically satisfies ERISA each year.
Is a fidelity bond the same as fiduciary liability insurance?
No. While a fidelity bond insures a 401(k) plan against losses due to fraud or dishonesty by persons who handle plan funds or property, fiduciary liability insurance insures plan fiduciaries in case they fail to meet their fiduciary responsibilities.
While a fidelity bond is required by ERISA, fiduciary liability insurance is not.
Can an ERISA fidelity bond be paid from 401(k) plan assets?
Yes. A fidelity bond can be paid by either the 401(k) plan or plan sponsor.
Are fidelity bond requirements monitored by the government?
Yes. 401(k) plans must report the dollar amount of their fidelity bond on their annual Form 5500. The government reviews these filings to confirm sufficient bonding.
What are the consequences for failing to meet ERISA’s bonding requirements?
There are no specific penalties. However, there are substantial risks associated with not meeting ERISA’s bonding requirements, including:
- Failing to report a sufficient bond on the Form 5500 can trigger a plan audit.
- It’s unlawful under ERISA for plan officials not to be bonded.
- 401(k) fiduciaries can be held personally liable for losses that should have been covered by a fidelity bond.
Fidelity bonds are affordable and easily purchased
Bottom line – if your 401(k) plan only holds publicly-traded securities (e.g., mutual funds, ETFs or common stock), obtaining an adequate fidelity bond is typically cheap and easy. “Blanket” bonds – which cover all your employees – are available for as little as $100 per year. Further, many surety companies make it possible to purchase new bonds or renewals online in minutes.
In short, it’s rarely difficult to meet ERISA’s bonding requirements when you understand their basics. If you have additional questions, your 401(k) provider should be able to help.