Bonding applies to a plan if, 95%* or more of plan assets are:
- Qualifying employer securities
- Participant loans
- Assets held by regulated financial institutions (e.g., banks, insurance companies, registered broker dealers)
- Mutual fund shares
- Assets in the individual account of a participant over which the participant may exercise control.
* Measured at the beginning of the year
Fidelity bonds are different from fiduciary liability insurance. A fidelity bond is designed to make a benefit plan “whole” from losses resulting from unethical conduct and/or fraudulent acts by employees when handling other people’s securities/money. Often, it is referred to as a “dishonesty bond”. F.L. insurance protects fiduciaries from breaches in responsibility, which often requires restitution of damages. In other words, a fidelity bond protects the plan, and fiduciary insurance protects the individual.
A fidelity bond is different from fiduciary liability insurance. ERISA mandates that all fiduciaries, or those who handle funds, be covered by a fidelity bond unless otherwise exempted.
Fiduciary liability insurance insures against plan losses due to breach of fiduciary duty. FLI is optional and not required by ERISA, any policy purchased by the plan must permit recourse by the insurer against a breaching fiduciary. Fiduciary insurance may not be purchased with plan assets.
It is an ERISA fiduciary duty to confirm that the plan is bonded appropriately. The Department of Labor enforces the requirement for retirement plans to have in place a fidelity bond.
Many individuals may simultaneously be burdened with the responsibility of ensuring that the “plan officials” are properly bonded. Additionally, each “plan official” is directly responsible for complying with his/her own bonding requirement, ERISA § 412(b) states it is unlawful for any plan official to permit any other plan official to “receive, handle, disburse, or otherwise exercise custody or control over plan funds or other property” without being properly bonded.
It is part of the fiduciary’s responsibility, to review ERISA Section 412 to ensure that the fidelity bond is in compliance with statute requirements.
