If your small business offers a 401(k) plan, then you are already well on your way to learning a new language – the language of 401(k)s. Your vocabulary may already include phrases like “participation rate,” “Form 5500,” and “top-heavy.” Or maybe even “hardship distribution,” “key employee,” and “safe harbor.” We certainly hope you are familiar with the two “A’s”: “auto enrollment and auto escalation.”
But what about the “ERISA fidelity bond”?
Not to be confused with Fidelity Investments, this matrimonial sounding term refers to insurance that protects plan participants from acts of fraud or dishonesty by those handling 401(k) funds. The fidelity bond is designed to reimburse the plan should participant funds go missing from embezzlement or other misappropriations.
Typically the named insured is the plan itself, while the fidelity bond covers those who handle the plan’s funds. These people could include employees of the company as well as third-party providers. However, a service provider is allowed to purchase its own fidelity bond, or the provider can be covered under the plan’s fidelity bond.
Not just any insurance policy
A fidelity bond differs from traditional property insurance. For example, the plan is not allowed to purchase the bond from just any insurance company. These insurance contracts must be purchased through a Treasury Department approved enterprise. A list of approved companies can be found at the Treasury’s website. Also, there can be no deductibles that reduce the responsibility of the insurance company should a loss occur. This means the plan is not relying on the insured individuals to come up with a portion of the funds required to make the plan whole in the event of a loss. A fidelity bond is designed to cover the first dollar lost.
Although the fidelity bond covers individuals, plan assets may be used to purchase the bond.
Who is covered under a fidelity bond?
Anyone who handles 401(k) funds or other property must be bonded unless covered under an ERISA exemption. That means bonding is usually required of the plan administrator and officers who handle plan funds through their duties such as receiving and disbursing funds. If an individual’s activities could result in a loss of plan funds, that person probably needs to be bonded. Such activities include:
- Power to transfer funds from the plan to oneself or a third party
- Physical contact with checks or cash
- Power to negotiate plan property
- Check signing authority
- Disbursement authority
It’s important to know that a fidelity bond is not the same thing as fiduciary liability insurance. The fidelity bond insurers the plan against malfeasance from those handling participant funds. Fiduciary liability insurance protects against fiduciary related claims, which could be wide ranging. For example, fiduciaries could face claims of mismanagement based on their selection of investments, or the fees associated with those investments. Or a claim could be made over administrative errors that take a bite out of plan assets.
Fidelity bond coverage is mandatory. Fiduciary liability covered is not – but certainly recommended!
Fidelity bond coverage amounts
The fidelity bond must provide coverage for each relevant individual of at least 10% of the funds handled by that person in the previous year. The bond can’t be less than $1,000 and is generally not required to be more than $500,000 for each plan year. The maximum is $1,000,000 if the plan holds certain illiquid assets like company stock. Of course, coverage can always be purchased for amounts greater than the required minimums.
Don’t drop the ball on the fidelity bond
Maintaining the appropriate fidelity bond is an important responsibility. A 401(k)’s plan fiduciaries can be held personally liable for losses that should have been covered by a fidelity bond. And reviewing fidelity bonds is a routine feature of ERISA plan audits.
**Fretting over fidelity bonds and other fiduciary tasks? **
If you are running your plan’s 401(k) then you know setting up and managing a retirement plan takes a lot of work and attention to get right. But there is no need to become a 401(k) expert if you don’t want to. Small business owners can delegate much of their day-to-day responsibilities to third party 401(k) fiduciaries. Delegating to experts not only reduces your legal liability, but also takes tedious work off your plate.
A good 401(k) fiduciary can make sure that the investment options are good, the 401(k) rules are being followed and check to make sure fees are reasonable. Most importantly, a fiduciary needs to act solely in the interest of plan participants. And that means making sure your plan has the appropriate fidelity bond.
If you have questions about your plan’s fidelity bond or are looking for help administering your company’s retirement plan, talk to ForUsAll today!