With so much attention lately on fiduciary duty and the surge of fiduciary litigation this past year, plan sponsors would be wise to explore their insurance options. While the ERISA fidelity bond (also referred to as a “fidelity bond” or “ERISA bond”) is required for all plans, there are other options as well. By understanding the difference—and the scenarios in which different types of insurance are used—you can help ensure your plan sponsors are properly protected.
The fidelity bond, required by ERISA, protects the plan against losses due to theft and embezzlement. Here’s an easy example: if someone steals money from the 401(k) plan, the ERISA bond compensates the plan for the damages. However, this provides no protection to the employer because the plan, not the employer, is the named insured. Not to mention how limited the application of this bond might be, given the unlikely scenario.
Still, the bond is legally required for anyone who “handles plan assets” (whether a fiduciary or not), and not having one can delay your plan’s Form 5500 filing and potentially result in disqualification, penalties, and personal liability for fiduciaries. Investment managers must have one, but advisors are not required to be bonded unless they make financial decisions about the plan assets or property.
An ERISA bond is easy and relatively inexpensive to obtain; businesses using Vestwell can apply for one directly from our platform. However, it’s worth noting that the bond must be in an amount of at least 10% of the plan’s assets, and for years with better investment performance, employers should make sure their bond amount has kept pace with the plan’s growth in assets.
Some employers mistakenly believe the ERISA fidelity bond protects them on all fronts, but further protection may be needed. Unlike an ERISA bond, Fiduciary insurance is not included in typical errors and omissions or directors and officers policy. Fiduciary insurance, as the name suggests, protects the fiduciary from damages that result from a fiduciary breach. Read the fine print on the insurance before moving forward because a fiduciary policy can cover litigation costs, foreign plans that are subject to laws similar to ERISA, and the cost of correcting plan compliance errors resulting from a fiduciary breach. Although fiduciary insurance is technically “optional,” we don’t believe an employer should leave anything to chance in the current litigation climate.
Mostly, it’s important for businesses to know the coverage that exists to protect them and their employees, understand the liability they’re taking on, and be comfortable with the decisions they’re making. They’ll be looking to you for help.