(b)lines Ask the Experts – What Is a Fidelity Bond?

“I am confused—is this the same as our fiduciary liability coverage? Or something different?”   

Michael A. Webb, vice president, Cammack Retirement Group, answers:

Excellent question! Although the Form 5500 only inquires whether a plan maintains fidelity bond coverage, all Employee Retirement Income Security Act (ERISA) plans should maintain fidelity bond coverage and fiduciary liability insurance, and they are indeed two separate and distinct types of insurance.

A fidelity bond is purchased for each ERISA retirement plan that an employer sponsors to satisfy the bonding requirements for retirement plans (and most other types of employee benefit plans as well). The bond protects against employee fraud and dishonesty in the handling of plan assets, and each employee or other individual who handles plan assets (e.g.  employees who remit funds to the recordkeeper) is required to be bonded. Plan fiduciaries who do NOT handle plan assets need not be bonded, and the bond does not cover any fiduciary breaches of the plan that are not directly related to fraud or dishonesty By statute, the coverage of the bond must be equal to 10% of plan assets, capped at $500,000 ($1,000,000 for retirement plans with direct investment in securities of the employer sponsoring the plan). Fidelity bond coverage is required under Section 412 of ERISA.

Fiduciary liability insurance protects plan fiduciaries, the sponsoring employer, and the plan itself from claims arising from alleged fiduciary breaches. Such coverage should not be confused with a fidelity bond or with standard errors and omissions insurance, such as Directors and Officers insurance or Employment Practices Liability insurance; fiduciary liability insurance is separate and distinct coverage that must specifically protect against fiduciary breaches under ERISA, such as failure to pay reasonable plan expenses, failure to remit contributions to the plan in a timely fashion, etc.  Breaches resulting from employee fraud or dishonesty are not covered under such insurance, as such breaches would be covered under the fidelity bond. Though there are no statutory limits with respect to such coverage, the marketplace will often limit the amount a plan may purchase. Plan sponsors often increase coverage as plan assets grow. Fiduciary liability coverage is NOT required under ERISA (hence the lack of a question of the 5500 relating to it), but the vast majority of plans purchase such coverage to protect their fiduciaries, since fiduciary liability is personal, not corporate.

A certificate of coverage for both types of insurance should be part of the plan’s permanent file, and the plan fiduciaries should ensure that such coverage remains in force via timely renewal.