ERISA Fidelity Bond versus Fiduciary Liability Insurance: What’s the Difference?

June 15, 2017 4:40 PM
By Brian Dobbis
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Plan sponsors often confuse the bond with insurance that is designed to protect them from personal liability.

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With so much attention to fiduciary responsibility in the past year—not to mention increased litigation and tighter regulation—plan sponsors have every reason to explore their insurance options. But there tends to be a lot of confusion, misperception, and misconception about the right course of action.

Is an ERISA [Employee Retirement Income Security Act of 1974] fidelity bond the same thing as fiduciary liability insurance? Absolutely not. So, what’s the difference?  

An ERISA fidelity bond, although required by law, has limited application: it only covers plan losses as a result of fraud, theft, forgery, embezzlement, or dishonesty by individuals who handle plan funds or property. Unfortunately, plan sponsors often conflate the bond with insurance that is designed to protect them from personal liability.

On the other hand, fiduciary liability insurance, though not required, insures fiduciaries for losses suffered due to breaches of duty. ERISA’s bonding requirements are intended to protect employee benefit plans from risk of loss due to fraud or dishonesty on the part of persons who handle plan funds or property of the plan, and may include the plan administrator, officers, and other such individuals that have access to plan funds.

Under ERISA Section 412, every fiduciary of an employee benefit plan is generally required to be bonded in order to protect employee benefit plans from risk of loss due to fraud or dishonesty on the part of the bonded individuals. ERISA requires every person handling plan funds to be bonded, unless an individual satisfies an exemption from the bonding requirements. A plan can purchase a fidelity bond using plan assets, since the bond protects the plan—not any individual handling plan funds.

The bond does not need to state a specific dollar amount. Instead, the amount of the bond generally must be fixed at the beginning of each plan year, and must be at least 10% of the amount of funds the individual handles, subject to a minimum bond amount of $1,000 per plan.

In most instances, the maximum bond amount that can be required under ERISA with respect to any one plan official is $500,000 per plan. However, the maximum required bond amount is $1 million for plan officials who hold employer securities.

Remember: The typical ERISA fidelity bond coverage is limited, as it protects the plan only from losses that result from fraud or dishonesty on the part of fiduciaries and other persons who handle plan funds. The amount of the bond is reported on IRS Form 5500, so it’s possible that not having a bond or obtaining a minimum coverage amount may trigger an audit. (More Department of Labor information on ERISA fidelity bonds can be found here.)

Fiduciary Liability
Fiduciary liability insurance typically insures the plan against losses caused by a breach of fiduciary liability. Purchasing insurance is not an ERISA requirement; however, fiduciaries may be held personally liable for losses incurred by a plan if they are found to be at fault.  

Though not mandatory, the actual process of deciding whether to purchase fiduciary liability insurance is itself a fiduciary act subject to ERISA rules. However, fiduciaries who seek protection must purchase insurance using personal assets, not plan assets, because insurance policies paid for out of plan assets must protect the plan, not the fiduciaries. Of interest is that ERISA does not impose a specific required amount of fiduciary insurance, because (as previously mentioned) there is no specific requirement under ERISA that retirement plans purchase a fiduciary liability insurance policy in the first place. As a practical matter, an ERISA plan should give serious consideration to obtaining coverage and, of course, should consult with both the plan’s advisor and counsel. In addition, fiduciary liability insurance could service as a safety net for plan fiduciaries.

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