The Employee Retirement Income Security Act of 1974 (ERISA) is a federal law, governed by the Department of Labor (DOL), that sets standards for most voluntary pension plans in the private industry in order to provide protection for participants in the plans. ERISA Section 412 generally requires that all fiduciaries of an employee benefit plan and every person who handles funds or other property of such a plan must be ‘bonded.’ It is their fiduciary responsibility to purchase an ERISA fidelity bond for any plan that falls under Title I ERISA.
In order to determine who is categorized as a person who is responsible for “handling funds,” please refer to Q8 & Q18. –LINK TO QUESTIONS
Question: How much should the bond be?
Qualifying assets: The DOL requires that plans that contain qualifying assets, held in an institution or that receive an annual statement, are ‘bonded’ at 10% of the total plan assets as of the plan year-end. The minimum bond should be $1,000 with a maximum bond amount required of $500,000; or $1,000,000 where the plan holds employer securities.
Non-qualifying assets: When a plan contains non-qualifying assets such as real estate, limited partnerships, gold, diamonds, etc., the assets must be bonded at 100%. However, where the non-qualifying assets are less than 5% of the total assets in the plan, all assets can be bonded as qualifying (10%). In the case where the assets “are” less than 5%, it is suggested that a bond be purchased annually to insure that if the assets do exceed the 5% limit they are bonded at 100%.
ERISA fidelity bond policies that offer an extended warranty or automatic increase allow the plan to grow while always being covered for the 10% required by the DOL for the term of the bond; there is no need to “over bond” but it is important to verify that coverage is adequate before assuming the plan is under bonded!
Question: Can an ERISA bond have a deductible?
The answer to this question is “no.” If the policy you are reviewing contains a “deductible,” the coverage you are reviewing is not for an ERISA fidelity bond! ERISA requires bonds to provide coverage from the first dollar of loss.
Question: Who should be named as the insured on an ERISA fidelity bond?
The named insured on the ERISA fidelity bond is the plan.
Question: Can more than one plan be insured under one ERISA fidelity bond?
The DOL states that more than one plan can be bonded under one policy, however, none of the plan’s bonds can work in detriment of the other. It is important to ensure that the total bond issued is enough to protect all plans in the event of a claim for theft or dishonesty.
The easiest way to confirm if the plan policy covers multiple plans adequately is to calculate the bond needed at 10% for each plan and add them together. Then confirm that the total bond amount is represented in the policy as neither plan bond can work in detriment of the other.
Question: How easily can you confirm that the policy your plan sponsor holds for their ERISA fidelity bond provides the plan with correct coverage?
To determine that the plan has correct coverage you should follow these guidelines:
- Make sure a reference is made to the maximum amount of coverage allowed by the policy ($500,000 or $1,000,000 where the plan holds employer securities)
- If the bond amount appears insufficient, look for verbiage that states the plan bond contains an auto increase or extended warranty
- If the policy states an amount of deductible, the coverage is not for the ERISA fidelity bond
- All plans to be covered by the ERISA fidelity bond covered should be fully named on the policy
- The total bond issued for more than one plan, must be enough to cover both plans
Question: What happens if a plan does not have a bond?
Fiduciaries who do not follow the principles of conduct (purchasing an ERISA Fidelity bond) may be personally liable to restore any losses to the plan, or to restore any profits made through improper use of plan assets where a bond is not held.
Courts may take whatever action is appropriate against fiduciaries who breach their duties under ERISA, including their removal as fiduciary of the plan.
Question: Who is a fiduciary?
A person is a “fiduciary,” as defined by ERISA, when he or she exercises discretionary control or authority over the plan or its assets.
Question: Who can sue a plan fiduciary and what are the costs associated with a fiduciary breach?
Lawsuits can be brought on by plan participants, beneficiaries, the DOL, and the IRS if they feel that a responsibility was breached. If sued, fiduciaries are personally liable for damages caused by breaches of fiduciary duty (ERISA 409, 29 U.S.C. 1109), as well as the expenses related to the lawsuit, including attorney review and representation, defense costs, judgment, fines and penalties. According to the latest Tillinghast Survey, the average cost of a paid claim was $994,000, with an average reported defense cost of approximately $365,000.
Conclusion
The best way for a plan sponsor to protect the participants of their plan and protect the personal assets of the plan’s fiduciaries is to carefully read their ERISA bond policy and purchase Fiduciary Liability Insurance.
