Protecting retirement savings from fraud and dishonesty is not just good business—it's the law.
Introduction
Every employer offering a 401(k) plan must understand and comply with the Employee Retirement Income Security Act (ERISA) fidelity bond requirements. This essential form of protection guards plan assets against losses resulting from fraud or dishonesty by those who handle plan funds. For plan sponsors, failing to secure proper bonding exposes both the plan and its fiduciaries to serious risk, including potential personal liability.
What Is an ERISA Fidelity Bond?
An ERISA fidelity bond is a type of insurance that protects 401(k) plan participants from losses caused by fraudulent or dishonest acts by individuals who manage plan funds. These bonds differ from fiduciary liability insurance, which protects fiduciaries from claims of mismanagement or breach of duty. ERISA fidelity bonds are legally required; fiduciary liability insurance is optional.
Key Roles in a Fidelity Bond:
- Insured: The 401(k) plan itself.
- Insurer: A surety company.
- Covered: Plan officials who handle plan funds.
If plan assets are lost due to fraud or theft, the plan can file a claim against the fidelity bond to recoup the losses.
Who Needs to Be Bonded?
Anyone who “receives, handles, disburses, or otherwise exercises custody or control of plan funds or property” must be bonded. These individuals—often referred to as plan officials—might:
- Handle cash or checks.
- Transfer or negotiate plan assets.
- Sign checks or authorize disbursements.
- Supervise those who perform any of these actions.
If an individual’s actions could lead to potential financial loss for the plan, they must be bonded.
How Much Coverage Is Required?
ERISA generally requires that each bonded plan official carry coverage equal to:
- At least 10% of the plan assets they handle.
- Minimum of $1,000, with a maximum of $500,000 (or $1 million if the plan holds employer securities).
This bond must:
- Cover the entire year.
- Begin with no deductible—covering the first dollar of any loss.
- Be recalculated annually based on plan assets or estimated contributions for new plans.
Risks of Noncompliance
Failing to meet ERISA bonding requirements can have significant consequences:
- Trigger an IRS or Department of Labor audit.
- Result in a fiduciary breach, exposing plan sponsors to personal liability.
- Cause unreimbursed financial losses if fraud occurs.
Plans must report fidelity bond coverage on Form 5500 annually—failing to do so accurately can raise red flags with regulators.
Getting Bonded: It’s Simple and Affordable
Fidelity bonds must be obtained from a surety listed by the U.S. Department of the Treasury. These bonds are widely available, cost-effective, and essential to maintaining plan compliance and protecting participant assets.
Resources:
- U.S. Department of the Treasury Circular 570: fiscal.treasury.gov/surety-bonds/circular-570.html
Plan Sponsors can choose a provider from the above list, such as Colonial Surety Company or Suretybonds.com.
Final Thoughts
As a 401(k) plan sponsor, ensuring proper ERISA fidelity bond coverage isn’t just a checkbox—it’s a safeguard for your employees’ retirement future and your own fiduciary peace of mind. Work with your advisor to verify your coverage, assess risks, and explore options for fiduciary liability insurance if additional protection is warranted.
For more information or to ensure your plan meets bonding requirements, consult your plan advisor or contact a qualified bonding provider.