Retirement plan sponsors and fiduciaries should understand the insurance products that are available to protect the plan and its fiduciaries. The two most common forms of insurance that a plan will purchase are the Fidelity Bond and Fiduciary Liability Insurance. All Employee Retirement Income Security Act (ERISA) plans are required to have a Fidelity Bond and many also have Fiduciary Liability Insurance.
ERISA Fidelity Bond
A Fidelity Bond is required for all employee benefit plans covered by ERISA. This is insurance that protects the plan and its participants from losses resulting from fraud or dishonesty. These bonds can only be purchased from companies listed in the Department of Treasury’s Listing of Approved Sureties. A plan may be insured on its own or may be added to an existing employer bond or insurance policy as long as the bond or policy satisfies the requirements of ERISA.
The plan is the named insured in the fidelity bond and then the bond must cover any persons who handle funds or other property of the plan. Any individual whose duties or activities could result in a loss of plan funds or property as a result of fraud or dishonesty is required to be covered. The types of losses that must be covered include but are not limited to:
- Larceny
- Theft
- Embezzlement
- Forgery
- Misappropriation
- Wrongful abstraction
- Wrongful Conversion
- Willful misapplication
The amount of the bond is generally 10% of the amount the covered individuals handled the previous year up to $500,000 ($1,000,000 if the plan holds employer securities). The cost of the Fidelity Bond can be paid from plan assets.
Fiduciary Liability Insurance
The Fidelity Bond protects the plan and its participants, while Fiduciary Liability Insurance typically protects the plan’s fiduciaries from claims of a breach of fiduciary responsibilities. This insurance is not required by ERISA, but many fiduciaries seek to have this coverage for their own protection. Without this coverage, a fiduciary could be personally liable for losses resulting from their fiduciary failures. The cost of the insurance can be paid by the employer or the fiduciary and not the plan assets. Examples of a breach of fiduciary duty may include:
- Errors in administering plans such as improper enrollment or termination
- Providing poor or negligent advice on investments within the plan
- Improper denial or change in benefits
- Failures in selection and monitoring of third-party service providers
The Fidelity Bond protects plan participants against losses resulting from fraud or dishonesty and many Fiduciary Liability policies exclude coverage for acts of fraud or dishonesty. The Fiduciary Liability Insurance protects the fiduciary from claims of a breach of their fiduciary duty.
For a copy of our Level 3 Fiduciary Training Material on this topic, click here.
Multnomah Group is a registered investment adviser, registered with the Securities and Exchange Commission. Any information contained herein or on Multnomah Group’s website is provided for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and, unless otherwise stated, are not guaranteed. Multnomah Group does not provide legal or tax advice.