Retirement plan fiduciaries face a complex framework of legal duties and liabilities. Insurance coverage, often overlooked, is crucial for compliance and risk protection. Under the Employee Retirement Income Security Act (ERISA), certain types of coverage are required, while others are recommended to mitigate risk and safeguard fiduciaries.
This article covers mandatory ERISA fidelity bond requirements, distinguishes them from fidelity liability insurance, and offers best practices for plan sponsors and oversight committees.
ERISA Fidelity Bond: A Legal Requirement
ERISA Section 412 requires anyone handling employee benefit plan assets to be bonded. This bond safeguards the plan against losses from fraud, dishonesty, or theft.
Essential Criteria:
- Coverage Amount: Minimum of $1,000 or 10% of plan assets, with a maximum of $500,000. For plans that include employer securities, the maximum coverage increases to $1 million.
- Who Must Be Bonded: Anyone with authority over plan assets, including fiduciaries, administrators, and specific third-party service providers.
- Where to Obtain: Bonds must be issued by a surety listed on the U.S. Department of the Treasury’s approved list.
- No Deductibles: ERISA bonds must provide first-dollar coverage with no deductible.
Compliance Tip: Failure to maintain an ERISA fidelity bond is a red flag for the Department of Labor and may trigger audits or penalties.
Fiduciary Liability Insurance: A Prudent Protection
While ERISA does not mandate fiduciary liability insurance as it does with fidelity bonds, obtaining this coverage is strongly advised. Fiduciary liability insurance provides individuals in fiduciary roles with personal protection against claims involving breach of duty, administrative errors, and other accusations of mismanagement.
What It Covers:
- Legal defense costs
- Settlements and judgments
- Claims related to excessive fees, imprudent investments, or prohibited transactions
Who It Protects:
- Fiduciaries such as plan sponsors, trustees, committee members, and executives.
- Why It Matters: Fiduciaries can be held personally liable—even for unintentional errors. Fiduciary liability insurance offers financial protection and encourages responsible governance.
Comparing the Two: Fidelity Bond vs. Fiduciary Liability Insurance
| Feature | ERISA Fidelity Bond | Fiduciary Liability Insurance |
| Required by Law | Yes | No |
| Protects | The plan and participants | Individual fiduciaries |
| Covers | Fraud, theft, dishonesty | Breach of fiduciary duty, errors |
| Payout Goes To | The plan | The fiduciary |
| Purchased By | The plan or the employer | Typically, the employer or fiduciary |
Understanding this distinction is essential. Fiduciary liability insurance does not satisfy ERISA’s fidelity bond requirement, and vice versa.
Governance Action Plan
- Review Bond Compliance: Ensure all individuals handling plan assets are properly bonded.
- Evaluate Fiduciary Risk: Analyze any potential risks and determine appropriate fiduciary liability coverage.
- Consult Experts: Work with insurance advisors familiar with ERISA to structure coverage effectively.
- Document Coverage: Keep thorough documentation of all insurance policies, including coverage details and renewal dates.
- Educate Committee Members: Ensure fiduciaries understand their responsibilities and the protections available.
How Can Our Unique Perspectives Assist You?
Navigating ERISA’s insurance requirements and fiduciary risks requires diligence and expertise. By securing the right coverage, you not only comply with regulations but also protect your organization and its fiduciaries from costly litigation and reputational harm.
We believe that proactive governance and risk management are the cornerstones of a resilient retirement plan. To learn more or schedule a consultation regarding your plan’s insurance coverage and fiduciary protections, contact Sharjeel Ahsan at sahsan@mjlm.com.
