Skip to main content

You are here

Advertisement

Case of the Week: ERISA Fidelity Bond vs. Fiduciary Liability Insurance

The ERISA Consultants at the Learning Center Resource Desk, which is available through Columbia Threadneedle Investments, regularly receive calls from financial advisors on a broad array of technical topics related to IRAs and qualified retirement plans. A recent call with a financial advisor in California is representative of a common inquiry about fiduciary issues filings. The advisor asked:

“Is an ERISA fidelity bond the same thing as fiduciary liability insurance?”

Highlights of Discussion


  • No, an ERISA fidelity bond and fiduciary liability insurance are not the same. An ERISA fidelity bond is required by law to cover plan losses as a result 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 Sec. 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 in order to protect employee benefit plans from risk of loss due to fraud or dishonesty on the part of the bonded individuals. The Department of Labor (DOL) has a handy hand-out 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.

  • 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. 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.[1. See U.S. DOL news releases, U.S. Labor Department sues officers of Dublin, Ohio, business to restore funds to 401(k) plan and Lack of Fidelity Bond Precipitates Labor Department Lawsuit.]

  • 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 purchase to protect 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 as a result 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.[2. Aronowitz, Daniel, "Trends in Fiduciary Liability Insurance: What new Coverage Does Your Employee Benefit Plan Need?" Benefits magazine, June 2015, pp. 18-24.]


Conclusion

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 Learning Center Resource Desk is staffed by the Retirement Learning Center, LLC (RLC), a third-party industry consultant that is not affiliated with Columbia Threadneedle. Any information provided is for informational purposes only. It cannot be used for the purposes of avoiding penalties and taxes. Columbia Threadneedle does not provide tax or legal advice. Consumers consult with their tax advisor or attorney regarding their specific situation.
Information and opinions provided by third parties have been obtained from sources believed to be reliable, but accuracy and completeness cannot be guaranteed by Columbia Threadneedle.

Columbia Threadneedle Investments (Columbia Threadneedle) is the global brand name of the Columbia and Threadneedle group of companies.

©2016 Columbia Management Investment Advisers, LLC. Used with permission.

Footnotes

Advertisement