401(k) Fidelity Bonds – Frequently Asked Questions

If you sponsor a 401(k) plan, the Employee Retirement Income Security Act (ERISA) requires you to carry a fidelity bond — insurance that protects your plan’s participants if someone who handles plan money steals or misuses those funds. It’s one of the easiest requirements to get wrong, and the risk is yours personally. If money goes missing from a plan that isn’t properly bonded, you — as a plan fiduciary — can be left to repay the loss out of your own pocket. A missing or undersized bond also shows up right on your Form 5500, where it’s a common red flag that can trigger a plan audit.

The good news is that meeting the requirement is neither difficult nor expensive — most small plans can be fully bonded for about $100 a year. We get a lot of questions about ERISA fidelity bonds from 401(k) plan sponsors, so we’ve collected the most common ones below. Use this FAQ to understand your bonding responsibility — including how to calculate the exact coverage your plan needs.

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, including the contributions flowing in, the investments held in the plan's trust, and the cash, checks, and securities used to pay benefits. The term matters because it sets the boundaries of the bond — a fidelity bond has to protect the plan's funds or other property, and anyone who handles those assets (i.e., a plan official) is who ERISA requires to be bonded.

Just as important is when assets become plan funds, because it happens earlier than many employers expect. Employee salary deferrals, for instance, become plan funds as soon as they can reasonably be segregated from the employer’s general assets — not when they finally land in the plan’s account. That gap — between when the deferrals become plan assets and when they’re actually deposited — is exactly when the money is most exposed, so the bond has to cover it, and the people responsible for moving it have to be bonded.

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 Fidelity 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 Fidelity Bond Provide?  

Bond amounts are set per person, based on how much each plan official “handles” — the plan money they can access, move, or control (the activities listed above). 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.

Those rules are easier to apply than they sound. Here’s how to size a typical plan’s bond in four steps:

1. 1. Start with the total plan assets your plan officials handle as of the first day of the plan year. For most small plans, the same people handle everything, so this is simply your total plan balance at the start of the year.
   2. Multiply that amount by 10%. The result is your baseline required coverage.
   3. Apply the $1,000 floor. If 10% of the assets handled comes to less than $1,000, you must still carry a bond of at least $1,000.
   4. Apply the $500,000 ceiling. You never have to bond more than $500,000 — or $1,000,000 if the plan holds employer stock — no matter how large the plan grows.

A few examples show how the floor and ceiling work in practice:

• • A plan with $2,000,000 in mutual funds and ETFs: 10% is $200,000, which sits between the floor and the ceiling, so the required bond is $200,000.
  • A plan with $8,000,000 in the same investments: 10% is $800,000, but the $500,000 ceiling caps the requirement at $500,000 (assuming no employer stock).
  • A brand-new plan with $6,000 on its first day: 10% is just $600, so the $1,000 floor applies and the required bond is $1,000.

The 10% test technically applies to each plan official based on the funds that person handles. But because the same people usually handle all of a small plan’s assets, plans typically satisfy the rule by bonding 10% of total plan assets under a single “blanket” bond that covers everyone at once.

What’s the Minimum Term of a Fidelity Bond?

A fidelity bond must provide at least one year of coverage, but it can cover a longer period at the plan official's discretion. 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.

The distinction comes down to who is protected and against what. A fidelity bond protects the plan itself — and, by extension, its participants — when someone who handles plan money steals or misuses it. Fiduciary liability insurance protects the plan’s fiduciaries personally when they are accused of mishandling their responsibilities: choosing imprudent investments, paying unreasonable fees, or failing to run the plan the way its documents require. Put simply, a bond guards the plan’s assets against dishonesty, while fiduciary liability insurance guards the fiduciaries’ own assets against claims that they breached their duties.

The two are also funded differently. Because a fidelity bond protects the plan, it can be paid from plan assets. Fiduciary liability insurance protects the fiduciaries, so it is usually paid by the business — and if a plan does pay for it, ERISA requires the policy to let the insurer recover from any fiduciary who actually commits a breach.

Here’s a side-by-side look at how the two compare:

Many employers carry both: the bond because ERISA requires it, and fiduciary liability insurance because the personal exposure that comes with being a plan fiduciary is real.

Can a Fidelity Bond be Paid from 401(k) 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 Fidelity Bond Requirements?

ERISA doesn't impose a specific fine for a bonding failure — but that's not as reassuring as it sounds. The actual consequences are less predictable and potentially far more serious, including:

• • Failing to report a sufficient bond on the Form 5500 can trigger a plan audit.
  • It’s technically 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.