DOL Clears Question over Plan Sponsor PEP Member Responsibility for Fidelity Bonds

Plan sponsors that join pooled employer plans managed by a pooled plan provider are not, in most cases, legally liable as the plan administrator and as such not required to purchase a fidelity bond, the Department of Labor wrote in an information letter.

The letter, in reply to a question from the Surety & Fidelity Association of America, clarified the levels of responsibility and costs plan sponsors participating in a pooled employer plan can offload or avoid when joining a pooled employer plan arrangement that is managed by a pooled plan provider, explained Josh Lichtenstein, partner and head of ERISA Fiduciary Practice at Ropes & Gray.

“This was really more than anything a clarification of exactly how much responsibility and costs plan sponsors can effectively offload or avoid when they use one of these PEPs as opposed to maintaining their own plan,” said Lichtenstein. “The Department of Labor, I take it from the response …did not view this as a controversial answer.”

Pooled employer plans were created by Congress in 2019 in the Setting Every Community Up for Retirement Enhancement Act, or SECURE. Pooled employer plans allow unrelated businesses to participate in one retirement plan managed by a pooled plan provider. The pooled plan provider is the plan fiduciary, with discretion for plan administration and investments.

“[Fidelity bonds are] not terribly expensive, but there’s a cost involved with them and if you don’t already have one, then there’s also the time involved in going out and obtaining it; you have to go to an insurer, you have to get the fidelity bond contract, you have to read over it, make sure everything is appropriate and that you’re comfortable with everything,” added Lichtenstein. “While it’s not a huge undertaking to get a fidelity bond, it is a process and so saving plan sponsors in PEPs from that is one further argument in favor of PEPS simplifying the process of offering a [retirement] plan.”

Additionally, the Department of Labor letter “make[s] it clear that they think that interpretation of the new rules with respect to PEPs under the SECURE Act follows from the Department’s long-held views under Section 412 [of the Employee Retirement Income Security Act] more generally for fidelity bonds,” added Lichtenstein.

“The PEP provider is the administrator of the plan, [and] the plan sponsor and the employees of the plan sponsor shouldn’t be viewed as handling plan funds or other property as they take the money from the plan participants and remit it to the PEP provider, so the provider can actually have it invested in the account,” explained Lichtenstein. “That should not be viewed as handling plan funds or other property in a manner that would require the fidelity bond so it saves the plan sponsor from the cost of buying its own fidelity bond … just the bond that the PEP provider has should be sufficient.”

The letter also clarified that the pooled plan provider “has the ultimate responsibility to have that fidelity surety bond,” Lichtenstein added.

Plan sponsors that are not in a pooled employer plan and the pooled plan provider must protect the plan against loss “by reason of acts of fraud or dishonesty on the part of individuals required to be bonded, whether they act directly or through connivance with others,” according to Department of Labor regulations.

The Department of Labor published this guide on fidelity bonds for plan sponsor questions about fidelity bond requirements and fiduciary liability insurance.