Helping Clients Understand Fiduciary Liability Insurance and ERISA Fidelity Bonds Who is Considered a Fiduciary? The Employee Retirement Income Security Act of 1974 known as “ERISA” regulates 401(k) and most other types of qualified employee benefit plans. Generally, in addition to anyone specifically named in the plan document as a fiduciary, individuals are ERISA fiduciaries, whether they acknowledge it or not, to the extent they: Exercise any discretionary authority or responsibility in the administration of the plan Exercise any authority or control concerning the management and disposition of plan assets Render investment advice with respect to plan assets, or have any authority or responsibility to do so, for a fee or other compensation, other than regular compensation received as an employee of the sponsor The fiduciary definitions in ERISA fall into the following categories: Named Fiduciary (Plan documents commonly name the plan sponsor/employer) Plan Administrator Trustee Investment Manager Investment Advisor Anyone else with a duty of loyalty and a duty to act with discretion or authority to any extent
What Is Fiduciary Liability Insurance? Fiduciary liability insurance indemnifies plan fiduciaries against losses suffered due to breach of fiduciary duties in the management and operation of a plan. Fiduciaries are personally liable for losses incurred by a plan due to their breach. Although fiduciary liability insurance isn’t required by ERISA, it is recommended because it may protect plan fiduciaries and their personal assets from losses resulting from claims of alleged errors, omissions or breach of fiduciary duties. In fact, employees and officers of the plan sponsor may also be covered under one of Pentegra’s fiduciary liability policies if they are acting in the capacity of a fiduciary.
What Is An ERISA Fidelity Bond And How Does It Differ From Fiduciary Liability Insurance? An ERISA Fidelity Bond is not the same thing as Fiduciary Liability Insurance. An ERISA Fidelity Bond insures the retirement PLAN against losses due to fraud or theft by people who handle the plan’s funds, securities or other tangible property. Fiduciary liability insurance, on the other hand, protects the fiduciaries themselves against personal
losses due to breaches of fiduciary responsibility. It is important to note that while many plan fiduciaries may have fiduciary liability coverage, ERISA doesn’t require it and it doesn’t satisfy the fidelity bonding requirement. Not every fiduciary of the plan needs to be bonded. The intent of the ERISA Fidelity Bond is to protect the plan from losses due to dishonest or fraudulent acts by people whose roles and responsibilities involve handling funds or other property of the plan. So, a plan fiduciary who has no access to these processes or authority to direct funds would not be required to be bonded.
Who Would be Covered by a Fidelity Bond? Under ERISA, anyone who handles plan assets must be covered by a fidelity bond. The bond protects the PLAN from losses that may result from fraudulent or dishonest acts.
What Are The Coverage Requirements For An ERISA Fidelity Bond? The amount of the required fidelity bond is 10% of plan assets the person handles, with a minimum of $1,000 and a maximum of $500,000. Since 2007, the maximum required bond for plans that hold employer stock or other employer securities has been $1,000,000. Buying more coverage is permitted, but that decision is a fiduciary act, too. Some retirement plans hold what are called non-qualifying assets. These are investments that include limited partnerships, artwork, collectibles, mortgages, real estate or the securities of “closely-held” companies. If a plan has more than 5% in these non-qualifying assets, the company needs either a bond amount equal to 100% of these “non-qualified” assets or it needs to arrange for an annual full-scope audit by a Certified Public Account (CPA).
Can The Plan Pay For The Fidelity Bonds Out Of Plan Assets? The named beneficiary of fidelity bonds is the Plan, not the fiduciary. The bonds don’t protect the people handling plan funds or property and doesn’t diminish their obligation to the plan. Because of this, the plan is permitted to purchase ERISA Fidelity Bonds from plan assets.
How is Fiduciary Liability Insurance Paid For? ERISA mandates that insurance policies paid for from plan assets must protect the plan, not the fiduciaries personally. Fiduciary liability insurance must be paid for separately, not from plan assets. This is why you will see a separate line item on invoices for fiduciary liability insurance from Pentegra. Pentegra purchases this insurance as part of our fiduciary service. Our services include coverage for exposure for fiduciary breaches and is among the most extensive coverage in the industry today. In turn, we share a small portion of this cost with clients as part of the cost of providing these value-added services. For more information, Contact the Pentegra Solutions Center at solutions@pentegra.com, or 855-549-6689. Follow us on
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