When managing an ERISA-governed retirement plan, one crucial component to consider is a fidelity bond. This type of insurance is not just recommended—it's a legal requirement designed to protect the plan and its participants from potential losses due to fraudulent or dishonest actions by those who handle plan assets [1].
What is a Fidelity Bond?
A fidelity bond, in the context of retirement plans, is a specific form of insurance mandated by the Employee Retirement Income Security Act (ERISA). Its primary purpose is to shield the retirement plan against losses resulting from fraudulent or dishonest acts, such as theft, embezzlement, or other forms of misconduct by the plan's fiduciaries or individuals managing the plan's assets [2]. This bond acts as a financial safety net, ensuring that participants' savings remain protected even in the face of dishonest activities.
"ERISA requires the people who handle plan funds and other properties (called "plan officials") to be covered by a Fidelity Bond, which is an insurance policy that protects employer-sponsored retirement plans from losses caused by acts of fraud and dishonesty by the plan's managers." - AdvisorSmith [3]
Who Needs to Be Bonded?
ERISA requires that every fiduciary of an employee benefit plan and any person who handles funds or other property of such a plan must be bonded. This includes trustees, administrators, and even employees of the plan sponsor if they handle plan funds. The coverage amount of the fidelity bond must be at least 10% of the amount of funds handled, with a minimum of $1,000 and a maximum of $500,000 per plan. For plans holding employer securities, the maximum required bond amount increases to $1,000,000 [1] [2].
Why is it Important?
The significance of a fidelity bond cannot be overstated. Retirement plans often hold significant assets, and the potential for loss through dishonest actions can be substantial. A fidelity bond provides a critical layer of protection, ensuring that any financial harm inflicted by acts of fraud or dishonesty is mitigated [1]. This protection is essential not only for the financial health of the plan but also for maintaining the trust and confidence of the plan participants.
Obtaining a Fidelity Bond
Securing a fidelity bond is a straightforward process but must be done with care to ensure compliance with ERISA requirements. Employers typically obtain these bonds through surety companies or insurance brokers. It's crucial to ensure that the bond amount is adequate and that the bonding company is listed by the U.S. Department of the Treasury as an approved surety [3]. Regular reviews of the bond coverage are recommended to adjust for changes in plan assets and ensure continued compliance.
Compliance and Best Practices
Maintaining compliance with ERISA's fidelity bonding requirements involves more than just purchasing a bond. Plan sponsors should routinely review their bonding coverage, especially as the value of plan assets fluctuates. Regular audits and diligent oversight of plan management practices can help identify and mitigate risks of fraud or dishonesty [1]. Training for those handling plan assets on the importance of ethical conduct and fiduciary responsibilities can further bolster the plan's security.
"By maintaining the required ERISA Bonds and adhering to the federal regulations, retirement plans can demonstrate their commitment to the financial security and protection of plan assets. This not only protects the interests of plan participants and beneficiaries but also helps build trust and confidence in the plan's management." - 3R Insurance [1]
In conclusion, a fidelity bond is a fundamental safeguard for any ERISA retirement plan, providing essential protection against the risk of fraudulent or dishonest acts. By ensuring that appropriate bonding coverage is in place and adhering to best practices in plan management, fiduciaries can fulfill their responsibilities and secure the financial future of their plan participants.
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References:
[1] 3R Insurance. (n.d.). Colorado ERISA Bonds (Cost & Coverage) | 3R Insurance. Retrieved from https://www.3rinsurance.com/bonds/erisa-bond-colorado
[2] TPS Group. (2022, June 2). Four Things to Know About ERISA Fidelity Bonds and Fiduciary Liability Insurance. Retrieved from https://tpsgroup.com/articles/four-things-to-know-about-erisa-fidelity-bonds-and-fiduciary-liability-insurance
[3] AdvisorSmith. (n.d.). What is an ERISA Fidelity Bond? Retrieved from https://advisorsmith.com/business-insurance/what-is-an-erisa-fidelity-bond/?amp=1
[4] U.S. Department of Labor, Employee Benefits Security Administration. (n.d.). Protect your employee benefit plan with an ERISA fidelity bond. Retrieved from https://www.dol.gov/sites/dolgov/files/ebsa/about-ebsa/our-activities/resource-center/publications/protect-your-employee-benefit-plan-with-an-erisa-fidelity-bond.pdf
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