Why do I need an ERISA fidelity bond?
You sponsor an employee benefit plan. Whether it’s a 401(k), or a employee stock ownership plan (ESOP), or one of the many welfare plans available (to name a few), you made the decision to provide this benefit for your employees.
It’s important to remember that employers have a responsibility to protect their employees, especially when it comes to their retirement savings. The Employee Retirement Income Security Act of 1974 (ERISA) codifies that. ERISA (pronounced urr-ISS-uh) prescribes the responsibilities of “fiduciaries” and the penalties for not complying.
It also gives us an idea of what an “employee benefit plan” technically is:
any one plan, fund or program established or maintained for the purpose of providing to its participants or beneficiaries employee benefits.
According to ERISA, if your company is a sponsor an employee benefit plan, it takes on a new fiduciary duty to its employees. Some companies don’t realize is that they, as plan sponsors, are fiduciaries just like the plan administrator and have specific responsibilities under ERISA.
- You must maintain an ERISA fidelity bond with a limit of at least 10% of the plan’s assets. A $1.5 million 401(k) plan needs to have a bond of at least $150,000.
- If you fail in your fiduciary duties and there’s a large financial loss, you can be held personally responsible.
What is it?
A bond is similar to insurance but is not the same. With insurance, there is an expectation that loss will occur. Additionally the relationship is really just between the insured and the carrier. In theory, you make a claim for an amount of money and the carrier pays you that amount of money.
With bonds, there is no such expectation of loss. This is covering a low-frequency risk. The contract also involves three parties: you (the principal), the insurance company (the surety), and the plan (the obligee). If the principal fails, the surety pays out directly to the obligee.
So what “failure” are we protecting against? When it comes to an ERISA fidelity bond, the primary focus is dishonesty and fraud.
A fiduciary liability policy will provide defense costs if you’re sued for mismanagement of a plan but it won’t respond to fraud and it won’t reimburse the plan for the lost funds. An ERISA fidelity bond fills in this gap. If, for instance, an employee embezzles funds from the plan, the fiduciary liability policy would deny the claim. It’s the ERISA fidelity bond that would jump into action and reimburse the plan. (More on the distinction here).
How do I protect my company and myself?
Want to read more on the subject? Check out our blog posts on fiduciary liability insurance.
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