When you sponsor a retirement plan for your employees, they are trusting you with their money. A single act of fraud or dishonesty related to the plan funds can have a devastating impact. That’s why, for the protection of the plan and participants, the Employee Retirement Income Security Act (ERISA) of 1974 specifically requires ERISA Bonds from all individuals and entities handling plan funds.
Protecting Retirement Plans Against Fraud and Dishonesty
Just as the name conveys, the purpose of the Employee Retirement Income Security Act (ERISA) is to safeguard the funds of employees enrolled in employer sponsored retirement plans, like 401ks, by laying out the responsibilities of the employers managing the plans. As Find Law explains, one of the specific requirements of ERISA is the ERISA fidelity bond:
Title I of the Employee Retirement Income Security Act of 1974 (ERISA) requires all individuals who handle funds or other property assets of an employee benefit plan to have ERISA bonds. This requirement extends to those who have physical contact with securities or currency (such as checks, cash, or banknotes) and those who have the authority to transfer, manage, or negotiate plan assets. For instance, the following roles are required to be bonded:
Plan administrators
Plan sponsors
Trustees
Service providers
Accounting firms
Third-party administrators
Investment advisors
An ERISA bond…protects employee benefit plans from losses due to fraudulent or dishonest acts by those handling plan funds. These bonds are essential for plan fiduciaries, administrators, and other related roles, ensuring compensation for losses up to the bond’s coverage limit. ERISA bonds safeguard the financial integrity of employee benefit plans by covering a range of fraudulent activities, including theft, embezzlement, and wrongful conversion.
The American Society of Pension Professionals and Actuaries (ASPPA) underscores that neglecting to obtain an ERISA bond from a Treasury-listed surety, is a very unwise move for any business sponsoring a retirement plan: “The annual Form 5500 series has a question about whether the plan is covered by a bond and how much the bond is….It is naive to think that one can go without a bond and not have it come to the attention of the regulators. It’s right there on the Form 5500 for anyone to go online and see.” To avoid triggering audits, investigations and penalties, plan sponsors need to maintain ERISA bond compliance. Though there are a few exceptions to ERISA Bond requirements, Section 412 of ERISA specifies:
- The bond must have a minimum payout of at least 10% of the plan assets. The minimum payout is $1,000, and the maximum is $500,000 or $1,000,000 for bonds that hold employer securities.
- The bond cannot have a deductible.
- The bond must identify the plan, such as the name of the retirement plan or trust, so that representatives can make a claim under it.
- The bond amount must be fixed annually for each fiduciary, depending on the plan asset total.
- The plan must be placed with a U.S. Department of the Treasury-approved surety or reinsurer. The plan fiduciaries have no control or interest in the surety or reinsurer.
- The bond must cover ERISA regulation criminal losses.
- The U.S. Department of Labor (DOL) provides additional information about bonding requirements.
Good To Know: How Do ERISA Bonds Work?
Find Law reminds us: “Every person who manages plan funds or other assets should meet the bonding requirements personally. In addition, anyone who allows another to manage these plan funds and assets should also ensure that the person managing them secures proper bonding.” When an ERISA Bond is obtained:
- The insured is the employee benefit plan itself.
- The principal is the plan fiduciary or the person who handles general assets and plan funds. They are the people “covered” by the bond and are the entities that the bond insures against dishonesty or fraud.
- The surety company issues the bond. They guarantee compensation for losses up to the maximum of the bond’s coverage.
Do ERISA Bonds Protect The Plan Sponsors?
ERISA Bonds protect the plan–not the sponsor. Under ERISA, plan sponsors are held to an exceptionally high standard of law, known as a fiduciary standard, and, because of this, can be held personally liable for errors and omissions related to their management of the plan. That’s why it is crucial for plan sponsors to obtain fiduciary liability insurance for their own protection, as accounting professionals at Adams Brown explain: “A fidelity bond protects against loss from fraud or dishonesty by an individual or individuals involved in managing the plan. Fiduciary liability coverage protects against loss that stems from the way the plan is run. For example, fiduciary liability coverage may cover losses in the event that employees file a lawsuit against the plan for charging exceedingly high expenses.”
Indeed, allegations of high plan fees and poor investment options have been at the heart of a storm of lawsuits proving costly and disruptive for retirement plan sponsors across the country. As fiduciaries, it is imperative for plan sponsors to understand:
- You can never fully eliminate the risk of being held personally accountable to the plan, participants and beneficiaries.
- Outsourcing plan services does not free you from your risks: as a sponsor, you choose the service providers and remain ultimately accountable for their success on behalf of plan participants and beneficiaries.
- Specific examples of what you can be held personally accountable for as a fiduciary include:
- Decisions: Do you have the right advisor, and investment options?
- Cost control: Are the plan fees reasonable and services solid?
- Compliance: Do operations adhere to the plan document, and government regulations?
As a fiduciary, you can also be held accountable for failing to adequately mitigate cybersecurity threats to the plan, or to curtail the damage from a breach. You can even be held responsible for failure to monitor your chosen service providers for their adherence to cybersecurity protocols.
If you face claims that you have failed in your responsibilities as a retirement plan sponsor, the only type of protection that shields you personally is Fiduciary Liability Insurance—-with it, you’ll be armed with coverage for defense and penalties. Without Fiduciary Liability Insurance, your personal assets are exposed.
To help retirement plan sponsors be compliant and protected, Colonial Surety Company offers an efficient and affordable Fiduciary+Cyber Liability Insurance bundle. For efficiency, you can even add the coverage on to your ERISA Bond. For a few dollars a day, you’ll be armed with:
- $1,000,000 for Defense and Penalties if you are faced with alleged or actual breaches of fiduciary duty.
- Cybersecurity Coverage for the business and plan, which addresses Department of Labor recommendations, and includes expert response services to curtail damage after an incident.
Get protected now: Fiduciary+ Cyber Liability Insurance
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