The Pension consultants at Planmark regularly receive calls on a broad array of technical topics related to qualified retirement plans. A recent call with a plan sponsor in Woodstock is a commonly asked question about fiduciary liability and fidelity bonds. The plan sponsor asked:
“Is fiduciary liability insurance the same thing as a fidelity bond?”
No, they are not the same. An ERISA fidelity bond is required by law to protect plan participants from losing plan assets, because of fraud. Fiduciary liability insurance, while not required, is recommended to help protect plan fiduciaries.
The Department of Labor (DOL) 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 an 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 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.
Fiduciary liability insurance
On the other hand, fiduciary liability insurance is purchased to protect fiduciaries themselves in the event they breach their fiduciary responsibilities with respect to the plan.
Remember, courts can hold plan fiduciaries personally liable for losses incurred by a plan because of their fiduciary failures. Fiduciary liability insurance is 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.2
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.
The Resource Desk is staffed by the pension experts at Planmark Financial Group, Inc., a third-party plan administration firm. Any information provided is for informational purposes only. It cannot be used for the purposes of avoiding penalties and taxes. Planmark does not provide tax or legal advice.
Consumers consult with their tax advisor or attorney regarding their specific situation.