If you sponsor a retirement savings plan for employees, for the protection of the plan, you are required by law to have an ERISA fidelity bond. It is also critical for retirement plan sponsors to protect themselves, since under the exceptionally high standards of the Employee Retirement Income Security Act (ERISA), you can be held personally liable for errors and omissions in your role as plan sponsor.
ERISA Fidelity Bonds Made Simple
When a company sponsors a retirement plan for employees (like a 401k), the person ultimately responsible for protecting the retirement savings of participants is referred to as the plan sponsor. Often, the plan sponsor is the business owner. A federal law, called ERISA (the Employee Retirement Income Security Act) requires plan sponsors (as well as anyone with a role in handling plan funds) to obtain an ERISA Fidelity Bond. The U.S. Department of Labor regulates compliance, and failure to have an ERISA Bond can result in investigation and penalties.
The purpose of an ERISA Bond is to protect the plan funds from acts of fraud or dishonesty committed by those trusted with handling the funds. You can learn more about ERISA Bonds here: ERISA Bonds Explained. This brief video also summarizes why retirement plan sponsors need ERISA bonds, and explains how to obtain an ERISA Bond, quickly and easily: Understanding and Obtaining ERISA Fidelity Bonds.
Helpful To Know: How much is an ERISA Bond?
By law, the ERISA bond amount, with a few exceptions, must be at least 10% of the plan assets handled as of the beginning of the plan year. There’s a minimum of $1,000 and a maximum of $500,000 for most plans. At Colonial Surety Company, to ensure consistent compliance, retirement plan sponsors can opt for an annual or multi-year premium, which is a small percentage of the total bond amount.
Understanding Fiduciary Liability Insurance
Under ERISA law, plan sponsors are held to a very high standard, known as a fiduciary standard: errors or omissions in their duties can result in being held personally liable. This means a lawsuit or investigation could target the personal assets of the sponsor (and other fiduciaries). Examples of allegations plan sponsors have to be prepared to defend themselves against include:
- Errors in administering retirement plans, such as improper enrollment or termination protocols
- Providing poor or negligent advice on investments within the plan
- Excessive fees associated with plan services
- Failures in selecting and monitoring third-party service providers
Legal defense, fines and penalties are very expensive in ERISA cases, and are not covered by traditional business insurance. Only Fiduciary Liability Insurance protects the plan sponsor from financial losses resulting from claims of mismanagement, errors, or omissions related to oversight of the retirement plan. Specifically, Colonial Surety’s affordable Fiduciary Liability Insurance provides up to $1,000,000 for defense costs and penalties in the face of allegations. Learn more about the fiduciary responsibilities of retirement plan sponsors at the Department of Labor, and via ERISA law professionals: Legally Obligated To Look Out for Others.
Summing Up: ERISA Bonds and Fiduciary Liability Insurance?
Yes, both ERISA Bonds and fiduciary liability insurance are key for retirement plan sponsors because they serve different purposes. Fiduciary liability insurance protects the plan sponsor from personal financial losses associated with allegations of omissions or errors under ERISA standards. An ERISA Bond is required by law to protect the plan from losses due to acts of fraud or dishonesty. Understand more about the difference between ERISA Bonds and Fiduciary Liability Insurance here: ERISA Bond Vs Fiduciary Liability Insurance.
One other area of risk that plan sponsors must guard against is cybersecurity. Since retirement plans contain money and data, they are lucrative targets for cybercrime. In fact, the Department of Labor obligates retirement plan sponsors to mitigate cybersecurity threats by following these guidelines: cybersecurity practices.
Underscoring that putting an expert response plan in place following a breach is essential, the Department of Labor also recommends cyber liability insurance.
Cyber liability insurance is a type of insurance that protects a business from financial losses and expenses resulting from cyber incidents, such as data breaches, cyberattacks, or network security failures. Specifically, Colonial Surety Company’s cyber liability insurance provides expert breach response services, mitigating damage and ensuring that obligatory investigation and notification procedures are implemented. Protection against lawsuits and regulatory actions are also covered.
To ensure that retirement plan sponsors can efficiently comply with ERISA Bond requirements, and affordably protect themselves and their businesses, Colonial Surety Company offers a special coverage bundle that includes: the ERISA Bond, Fiduciary Liability Insurance, and, at no extra cost, $50k of cyber liability insurance.
Get full circle protection, in minutes now: Fiduciary+ Cyber Liability Insurance
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