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. In fact, for most ERISA plans, having a fidelity bond is a legal requirement.
Leveraging broader coverages and limits available in the marketplace can provide further protection from losses due to third-party perils, especially for plans with significant assets.
This article explains why and addresses how to bring your fidelity bond coverage up to date.
In most instances, ERISA requires every person who handles ERISA plan funds or other property to be bonded against fraud and dishonesty losses. Maintaining bonding compliance is a fiduciary function under ERISA.
The bond must cover at least 10 percent of the amount of plan assets that each of those people handled in the prior year. In general, this calculation is capped at a $500,000 limit for plans with assets of $5 million or more. 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. Consequently, inflation has devalued it.
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.
A plan may purchase a higher bond limit than what is required. DOL Field Assistance Bulletin 2008-04 states:
[A]lthough ERISA cannot require a plan to obtain a bond in excess of the statutory maximums (absent action by the Secretary [of Labor]…), nothing in section 412 [of ERISA] precludes the plan from purchasing a bond for a higher amount. Whether a plan should purchase a bond in an amount greater than that required by section 412 is a fiduciary decision subject to ERISA's prudence standards.
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. Based on asset size, higher limits may be appropriate, especially if more than one plan is on the policy.
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. Your plan could be also be exposed to acts committed by third parties for risks not covered under ERISA bonding requirements.
Make sure your internal controls, such as multi-factor authentication and staff training on phishing, spoofing and other social engineering fraud activity are strong. Additionally, if you have a clean loss history without any fraud or dishonesty claims, bring that to the insurer’s attention. Increasingly, underwriters consider organizational controls and loss history when assessing risk to price fidelity bonds, giving better rates to plans with strong controls and no claims.
Make sure your fidelity bond has an inflation-guard provision. As the name suggests, that provision will increase the policy’s ERISA-required limit to keep pace with asset growth.
If your fidelity bond covers more than one plan (e.g., defined benefit, defined contribution and health), 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 ERISA-required limits for the other plans. When reviewing the adequacy of coverage for multiple plans, keep in mind their different risk profiles.
Review the scope of your bond’s coverage as well as the bond’s 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. Also consider optional non-ERISA third-party coverage for computer fraud, fund transfer fraud and social engineering fraud losses. This additional coverage provides broader protection against modern fraud threats than the fidelity bond alone offers.
Plan sponsors are encouraged to reach out to legal counsel and insurance industry professionals, like Segal’s Insurance Brokerage Practice, for guidance on ERISA bonding requirements.
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.