With a wave of class action lawsuits sweeping the retirement plan industry, many plan sponsors and fiduciaries are looking at solutions that can help protect themselves and their companies from costly liability.
Protection for plan sponsors and fiduciaries generally comes either from ERISA fidelity bonding or fiduciary liability insurance. Both forms of protection are valuable for plan sponsors and participants. It is important to know what protections an ERISA fidelity bond and fiduciary liability insurance offer that make them different.
Fidelity bonding is required.
The first distinction is a critical one—fidelity bonding is required under ERISA regulation. Fiduciary liability insurance is optional. Nearly all retirement plans under ERISA are subject to the bonding requirements (although there are a few exceptions).
An ERISA fidelity bond protects the plan from the risk of loss due to fraud or dishonesty from any plan official who handles plan funds. This protection would apply in the event that plan assets are stolen, embezzled, misappropriated and other types of unlawful activities.
Who is covered by the bond?
The plan is the insured and has the ability to recover losses in the event of fraud or dishonesty. Any person associated with the plan who “handles funds or other property” on behalf of the plan is covered by the bond.
How much bonding is required?
This is an area where many plan sponsors fall short. ERISA stipulates that the plan must be bonded for 10% of the value of the assets. There are a $1,000 minimum and $500,000 maximum requirement for the bonding amount. For plans that include employer stock, the maximum bonding amount increases to $1 million.
If the fidelity bond amounts are insufficient, the plan runs a higher risk of a Department of Labor audit to look for other irregularities that could result in penalties against plan sponsors.
Fiduciary liability insurance is optional.
There is no ERISA requirement for plan sponsors or fiduciaries to purchase liability insurance, but it can be valuable to protect the personal assets of plan fiduciaries.
Liability insurance covers plan fiduciaries from personal liability in the event of a breach of fiduciary duty. And liability insurance does not fulfill the ERISA bonding requirement. If a plan purchases insurance for plan fiduciaries, it must also fulfill the bonding requirement.
Liability insurance can provide an important “safety net” for plan fiduciaries if they find themselves in the sights of lawyers looking to file class action lawsuits for excessive management fees. Plan sponsors can be held personally liable for the investment selections offered in the plan’s lineup. With more lawsuits targeting high-fee and actively managed funds, coverage from liability can offer protection for plan fiduciaries so they may continue to carry out their responsibilities to plan participants.
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