Plan sponsor oversights add up fast, as a lawsuit brought by the Department of Labor (DOL) painfully reminds us. Allegations, specifically naming a plan sponsor, include abandonment of the plan—and failure to obtain the mandated ERISA fidelity bond.
Reporting on the allegations related to a closed timeshare properties business that have been filed in the U.S. District Court for the Southern District of West Virginia, Plan Sponsor notes: “The DOL sued…alleging the plan was abandoned by fiduciary…locking out participants from accessing accounts or making contributions to the plans.” Specifically, the DOL claims that the sponsor “terminated the third-party administrators’ access to the plan by barring contributions from employees” and failed “to obtain a fidelity bond, as required by ERISA.” Under the high standards of ERISA law, the defendants in the case, including the plan sponsor, are facing three claims of fiduciary breach, as well as ramifications from transferring the business assets “to an unnamed successor,” and thus essentially locking participants out of the plan. Further complications stem from the fact that the third party administrator “has ceased operations.”
Good To Know: ERISA Bonds Explained
Though most plan sponsors will avoid the tangle of allegations made in West Virginia, the reality is: many plan sponsors make routine mistakes related to ERISA fidelity bonds, and these too can stack up. It’s important to remember that under Section 412 of The Employee Retirement Income Security Act (ERISA), ERISA fidelity bonds are specifically required as a protection against theft. As legal experts explain: “For retirement plans, ERISA imposes a requirement that every fiduciary and every person who handles plan assets be bonded to protect the plan from risk of loss due to fraud or dishonesty. This bond must cover at least 10% of the plan’s assets, up to a maximum of $500,000 per loss…” Fiduciary News points out these types of mistakes made by plan sponsors related to ERISA bonds:
“Some plan sponsors have a fidelity bond covering just 3-5% of total assets when it should be at least 10% according to ERISA Section 412…“Many 401k plan sponsors are simply not aware of: 1) the fidelity bond itself; 2) what’s required of that bond so that it protects the plan from losses due to fraud or dishonesty; or, 3) the risks associated with insufficient coverage, including triggering a plan audit or holding the plan fiduciary personally liable for losses that should have been covered by an ERISA fidelity bond.”
The ERISA fidelity bond required by the Department of Labor can only be obtained from a surety listed by the U.S. Department of Treasury—like Colonial Surety. As a leading national ERISA bond provider, Colonial helps plan sponsors ensure compliance. Uniquely, Colonial includes retroactive ERISA fidelity bond coverage for years when the plan was not adequately covered. Additionally, plan sponsors can opt for multi-year coverage, ensuring the ERISA bond remains Department of Labor compliant for the life of its term. Obtain ERISA Fidelity Bond Here Now.
ERISA Bond vs Fiduciary Liability Insurance?
Another common mistake plan sponsors make is failure to protect themselves in the event they face allegations of a breach of their fiduciary obligations. Eisner Amper emphasizes that while ERISA fidelity bonds provide protection from acts of fraud and dishonesty, only fiduciary liability insurance offers protection against fiduciary breach claims:
For instance, an employee acting in good faith may make a mistake in administering the plan according to plan documents or fail to monitor third-party service providers, which may result in penalties or losses arising to the plan. Because these acts were taken in good faith and are not acts of dishonesty or fraud, they are not covered under an ERISA bond….ERISA does not require fiduciary liability insurance, however, it should be considered as protection against fiduciary breaches. Fiduciary liability insurance is designed to provide defense costs and applicable damages for actual or alleged breaches of fiduciary duty. Unlike the fidelity bond, fiduciary liability insurance offers plan fiduciaries protection of personal assets.
Without coverage, even a mere allegation of a fiduciary breach against the high standards of ERISA law can be ruinous for plan sponsors. Consider, for example, that defense costs alone are about $600 per hour. These days, even a relatively minor cybersecurity incident can rapidly spiral into a fiduciary disaster too. That’s why Colonial Surety offers an affordable Fiduciary+Cyber Liability Package for plan sponsors. Armed with this protection you’ll have:
- Legal defense and coverage for penalties against claims of alleged or actual breaches of fiduciary duties—up to $1,000,000.
- Defense against lawsuits and regulatory actions related to a cyber breach.
- Expert-led response, notification and crisis management services to prevent a cyber incident from spiraling into a disaster.
Colonial makes it so fast and reasonable for plan sponsors to secure all this protection, that you can obtain yours in minutes now:
Good To Do: Brush Up!
It’s always a good idea for plan sponsors to brush up on their understanding of fiduciary obligations under ERISA and the DOL offers resources, including these:
Meeting Your Fiduciary Responsibilities – This publication provides an overview of the basic fiduciary responsibilities applicable to retirement plans under the law.
Understanding Retirement Plan Fees And Expenses – This booklet will help retirement plan sponsors better understand and evaluate their plan’s fees and expenses.
Tips For Selecting And Monitoring Service Providers For Your Employee Benefit Plan – Business owners are responsible for ensuring that their 401(k) plans comply with Federal law and rely on other professionals to assist them with their plan
Colonial Surety Company is rated “A Excellent” by A.M. Best Company, U.S. Treasury listed and in business all across the country. Serving customers since 1930, we are the trusted source for the pension industry to secure legally required ERISA bonds, fiduciary liability insurance and cyber-liability insurance. We help safeguard plan sponsors, pension professionals and financial advisors — and keep their businesses compliant — with pain-free, efficient, and friendly service every time.