ERISA Fidelity Bond vs. Fiduciary Liability Insurance--What's the Difference?
ERISA fidelity bonds and fiduciary liability insurance are two distinct coverage plans. An ERISA fidelity bond is required by law; fiduciary liability insurance is optional, but potentially a prudent safety net.
Welcome to the Retirement Learning Center’s (RLC’s) Case of the Week. Our ERISA consultants regularly receive calls from financial advisors on a broad array of technical topics related to IRAs, qualified retirement plans and other types of retirement savings and income plans, including nonqualified plans, stock options, Social Security and Medicare. This is where we highlight the most relevant topics affecting your business. A recent call with a financial advisor in California is representative of a common question on fiduciary protection.
“What is the difference between a retirement plan’s ERISA fidelity bond and fiduciary liability insurance?”
Highlights of the discussion
That’s a great question because they are often confused. An ERISA fidelity bond and fiduciary liability insurance are not the same. What follows is a comparison table and more details to help make the differences clear.
Feature | ERISA Fidelity Bond | Fiduciary Liability Insurance |
Purpose | Protects the plan from loss due to fraud or dishonesty | Protects fiduciaries from claims of mismanagement |
Required by Law? | Yes, under ERISA §412 | No, but highly recommended [ERISA §410(b)] |
Who is Covered? | Individuals who handle plan assets | Fiduciaries (e.g., plan administrators, trustees) |
Who is Protected? | The plan and participants | Plan fiduciaries (individuals or entities) |
Type of Risks Covered | Fraud, theft, embezzlement | Breach of fiduciary duty, errors, mismanagement |
Minimum/Typical Coverage | 10% of plan assets (at least $1,000 up to $500,000 or $1 million for plans with employer securities) | Chosen by employer; varies widely by risk and plan size |
Payout Goes To | The plan to recover stolen/misappropriated funds | Typically, the covered fiduciary, for defense costs, settlements, etc. |
Regulatory Compliance | Mandatory for most plans | Optional, but may help with risk management |
Premium Paid By | Typically, the plan | Typically, the employer/plan sponsor |
Where Purchased? | From a DOL certified company only | Insurance providers |
An ERISA fidelity bond is required by law to cover plan losses because of fraud. Fiduciary liability insurance is not required, but it may be a good idea to help protect plan fiduciaries.
The Department of Labor (DOL), under ERISA §412 and related regulations, generally requires that every fiduciary of an employee benefit plan and every person who handles funds or other property of a plan to be bonded to protect employee benefit plans from risk of loss due to fraud or dishonesty on the part of the bonded individuals. Through examination of Forms 5500, the IRS has determined that one of the top two most common compliance issues among plans is not having adequate ERISA fidelity bonding. The DOL has a handy online resource entitled, Protect Your Employee Benefit Plan with an ERISA Fidelity Bond that provides an overview of the bonding requirements and how to obtain a bond.
The amount of the ERISA fidelity bond is 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 that hold employer securities. The DOL has the authority to file suit against plan fiduciaries for lack of, or failing to have, an adequate fidelity bond. Generally, lack of a or an insufficient fidelity bond portends more involved fiduciary failings. See the following U.S. DOL news releases:
An investigator or auditor will use this checklist (Figure 3) to determine whether a plan’s fidelity bond complies with ERISA §412. Also see the Department of Labor’s Field Assistance Bulletin 2008-4 for more details on ERISA fidelity bonds.
Fiduciary liability insurance, on the other hand, is insurance plan fiduciaries voluntarily purchase to protect themselves in the event they breach their fiduciary responsibilities with respect to the plan [ERISA §410(b)]. Remember, courts can hold plan fiduciaries personally liable for losses incurred by a plan because of their fiduciary failures. Fiduciary liability insurance — while not required — could be an important financial safety net for plan fiduciaries. During a DOL investigation, the investigator will inquire whether the plan fiduciaries have such insurance.
Evolving demands have led to important expansions in fiduciary liability insurance coverage. Once limited to protecting trustees from fiduciary breaches and administrative errors, now enhanced policies can cover such things as the cost of plan corrections made through voluntary compliance programs, settlor and nonfiduciary claims, defense costs associated with regulatory investigations and regulatory penalties, which may not be paid from plan assets.
Conclusion
ERISA fidelity bonds and fiduciary liability insurance are two distinct coverage plans. The law requires most plans have an ERISA fidelity bond; whereas fiduciary liability insurance is optional, but potentially a prudent safety net.