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Karie M. OConnor,
CIMA®, CPFA®, AIFA®, QKA®

Director – Institutional Advisory Services

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Jeffrey P. DeHaan, CFP®

Managing Partner – Private Wealth Management

Protecting Plan Assets – ERISA* Fidelity Bonds and Fiduciary Liability Insurance

Karie M. OConnor Kevin G. Carani April 01, 2024

Often times we are asked about ERISA Bonds and Fiduciary Liability Insurance. Both provide protections for employee benefit plans. Understanding the requirements and differences can help Plan Sponsors determine their needs and better understand how to protect their plan(s) from possible loss.

Every person who “handles funds or other property” of an employee benefit plan is required to be bonded unless covered under an exemption under ERISA. ERISA makes it an unlawful act for any person to “receive, handle, disburse, or otherwise exercise custody or control of plan funds or property” without being properly bonded. Fidelity bonding is usually necessary for the plan administrator and those officers and employees of the plan or plan sponsor (employer, joint board, or employee organization) who handle plan funds by virtue of their duties relating to the receipt, safekeeping and disbursement of funds. The bonding requirement is not limited to just plan trustees, employees of the plan, and employees of the plan sponsor. Bonding coverage may also be required for other persons, such as service providers to the plan, whose duties involve access to plan funds or decision-making authority that can give rise to a risk of loss through fraud or dishonesty.

What is the criteria for determining whether an employee “handles funds”?

How much Coverage Must the Bond Provide?

Plan Sponsors must also maintain a minimum amount of coverage. Generally, each person must be bonded in an amount equal to at least 10% of the amount of funds he or she handled in the preceding year. The bond amount cannot, however, be less than $1,000, and the Department of Labor does not currently require a plan official to be bonded for more than $500,000, or $1,000,000 for plans that hold employer securities. These amounts apply for each plan named on a bond.

For example, assume your company’s plan has funds totaling $1,000,000. The plan trustee, named fiduciary and administrator are three different company employees that each have access to the full $1 million, and each has the power to transfer plan funds, approve distributions, and sign checks. Under ERISA, each person must be bonded for at least 10% of the $1 million or $100,000. (Note: Bonds covering more than one plan may be required to be over $500,000 to meet the ERISA requirement because persons covered by a bond may handle funds or other property for more than one plan.)

Many bonds, but not all, will have an escalation clause in them that will raise the amount of coverage as the plan assets grow.

What if we have a Crime Policy?

Separate and distinct from the required ERISA bond, employers may obtain certain third-party coverages on a crime policy.

While this coverage may cover the organization for an insider who steals money, a crime policy or fidelity bond will not cover you for any third party that may file a claim (for example, an unhappy participant or former employee with a balance in the plan).

Fiduciary Liability Insurance

While employers are not legally required to maintain Fiduciary Liability Insurance under ERISA, many plan sponsors have come to consider Fiduciary Liability Insurance a practical requirement. There has been a significant increase in plan litigation in recent years, particularly involving challenges related to fees, fee transparency and investment in 401(k) and 403(b) plans.

When discussing Fiduciary Liability Insurance, the analogy often used is that doctors need professional liability coverage, malpractice insurance. Fiduciary liability insurance is essentially malpractice insurance for fiduciaries and trustees of private sector employee benefit plans. Under the law, you have individual liability and co-fiduciary liability and therefore you can be accused of a breach of fiduciary duty or negligence in the administration of your plan. So, having fiduciary liability insurance provides you with coverage in the event a claim is made.

Generally, fiduciary liability insurance protects an employee benefit plan from losses caused by a breach of fiduciary responsibilities, fiduciary duty, administrative errors or omissions when and if mistakes are made. As a fiduciary can be held personally liable, these policies can help protect a fiduciary’s personal assets. It is critically important that all clauses of the policy are reviewed carefully so you know exactly what is covered, who is insured, what losses will be paid, and what triggers coverage (a claim).

Summary

Simplified, if the employee benefit plan is the insured entity, coverage is likely provided by a mandatory Fidelity Bond. If the insured entity is an individual who acts in a fiduciary capacity (including functional fiduciary capacity), coverage is likely provided by “optional” fiduciary liability insurance.

Making sure the proper insurance coverage is in place for your plans is an important decision. Understanding the differences and possible implications is a prudent step in mitigating your plan from possible loss.


*Employee Retirement Income Security Act of 1974

ERISA is a federal law that sets minimum standards for most voluntary established retirement and health plans in private industry to provide protection for individuals in these plans.

Source: U.S. Department of Labor -Meeting Your Fiduciary Responsibilities www.dol.gov

Karie M. OConnor

Kevin G. Carani

disclosure

THIS COMMENTARY HAS BEEN PREPARED BY CLEARWATER CAPITAL PARTNERS. THE OPINIONS VOICED IN THIS MATERIAL ARE FOR GENERAL INFORMATION ONLY AND ARE NOT INTENDED TO PROVIDE OR BE CONSTRUED AS PROVIDING LEGAL, ACCOUNTING, OR SPECIFIC INVESTMENT ADVICE OR RECOMMENDATIONS FOR ANY INDIVIDUAL. ALL ECONOMIC DATA IS DERIVED FROM PUBLIC SOURCES BELIEVED TO BE RELIABLE. TO DETERMINE WHICH INVESTMENTS MAY BE APPROPRIATE FOR YOU, PLEASE CONSULT WITH US PRIOR TO INVESTING. INVESTING INVOLVES RISK WHICH MAY INCLUDE LOSS OF PRINCIPAL.

This material is not intended to be relied upon as a forecast, research or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities, insurance products, or to adopt any investment strategy. The opinions expressed are as of the date of writing and may change as subsequent conditions vary. The information and opinions contained in this material are derived from proprietary and nonproprietary sources deemed by Clearwater Capital Partners to be reliable, are not necessarily all-inclusive and are not guaranteed as to accuracy. Past performance is no guarantee of future results. There is no guarantee that any forecasts made will come to pass. Reliance upon information in this material is at the sole discretion of the reader. Investment involves risks. International investing involves additional risks, including risks related to foreign currency, limited liquidity, less government regulation and the possibility of substantial volatility due to adverse political, economic or other developments. Index performance is shown for illustrative purposes only. You cannot invest directly in an index. S&P 500 is a registered trademark of Standard & Poor’s Financial Services, a division of S&P Global (“S&P”)  DOW JONES, DJ, DJIA and DOW JONES INDUSTRIAL AVERAGE are registered trademarks of Dow Jones Trademark Holdings (“Dow Jones”). The two main risks related to fixed-income investing are interest rate risk and credit risk. Typically, when interest rates rise, there is a corresponding decline in the market value of bonds. Credit risk refers to the possibility that the issuer of the bond will not be able to make principal and interest payments.

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