Articles | December 2, 2022

Why It May Be Time to Review Your Fidelity Bond’s Limit

As a plan sponsor subject to ERISA, you know how important it is to have a fidelity bond for protection against losses caused by fraudulent or dishonest actions by those who handle plan assets. However, you may not be aware that your fidelity bond’s limit could be too low — especially if it’s pegged to the maximum ERISA requires.

This article explains why and addresses how to bring your fidelity bond coverage up to date.

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ERISA requirements haven’t changed in nearly 50 years

In most instances, ERISA requires plans to have a fidelity bond that covers every person who handles plan funds or other property. The bond must cover at least 10 percent of the amount of plan assets that each of those people handled in the prior year.

Under ERISA, a plan with assets of $5 million or more is generally not required to have more than $500,000 in fidelity bond coverage. There’s an exception to this rule for plans that hold employer securities, in which case, the maximum required limit would be $1 million.

The $500,000 maximum per plan threshold was set in late 1974 and became effective on January 1,1975. Since then, the limit has never been adjusted.

Your plan might need a higher limit

For plans subject to ERISA, the limit threshold is the maximum required, but may not necessarily be enough coverage for your plan. For plans with assets in the tens of hundreds of millions, or even billions, trustees should consider higher limits. Nothing precludes a plan from purchasing a higher bond limit than what is required, as this DOL Field Assistance Bulletin explains. 

If the size of assets under management for your plans has grown substantially or there is an increase in the number of people responsible for handling plan assets, a higher limit may be needed to address the rising costs associated with bond related losses.

Review your fidelity bond limit and the scope of its coverage

It’s a good idea to evaluate your coverage limit every time you renew your fidelity bond coverage, whether it covers one year or multiple years.

Consider how your risks have changed. As noted above, the amount of possible loss increases with the growth in plan assets. The larger the asset base, the greater the exposure for plan losses.

Make sure your fidelity bond has an inflation-guard provision. As the name suggests, that provision will increase the policy’s limit to keep pace with asset growth.

If your fidelity bond covers more than one plan, the limit must equal at least the sum of each plan’s individual required limit and you can request a provision that applies the ERISA limit to each covered plan. The provision should be included to ensure that a covered loss which affects more than one plan does not exhaust the limit.

If your plan has a new vendor that handles assets, review whether the plan’s bond extends coverage to losses caused by the vendor’s employees.

Plan sponsors are encouraged to seek guidance on ERISA bonding requirements from their legal counsel and insurance industry experts, like Segal’s Insurance Brokerage Practice.

What questions do you have about your fidelity bond coverage limit?

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This page is for informational purposes only and does not constitute legal, tax or investment advice. You are encouraged to discuss the issues raised here with your legal, tax and other advisors before determining how the issues apply to your specific situations.