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ERISA Bond & Fiduciary Insurance - Class 306

Since our sophomore year at 401K University focuses on Fiduciary Best Practices, we would be remiss if we didn’t discuss the importance of an ERISA Bond and Fiduciary Liability Insurance. 

The world of fiduciary law is so nuanced that even if you follow all of the guidelines of this course, you could still find yourself in an area of the law that could leave the plan fiduciaries exposed. This is where an ERISA Bond and Fiduciary Insurance can help provide your team with the necessary protection.

First, let’s get one of the biggest misnomers of retirement plans out of the way.  I can’t tell you how many times over the years I’ve heard plan sponsors tell me “I’m not a fiduciary on the plan” or “My advisor does all of this stuff for us”.  I’m here to give you the sobering news that someone at your company, and possibly several people, are fiduciaries to the plan.  If you have the ability to make decisions or influence decisions as to the providers selected to support your plan, how the 401(k) is designed, or modified over time, you are a fiduciary on your plan (see Class 301 –Who & What is a Fiduciary for more details). As such, you have a responsibility to oversee the plan in the best interests of the participants first and all other parties second. If you are found to be in breach of your fiduciary duty, you could be held personally liable for any losses associated with your negligence.  
If the above concerns you, the good news is that there are two programs that have been designed to help protect you as a fiduciary on the 401(k).  Since the ERISA Bond is a requirement of the retirement plan, let’s start with this one.  The ERISA Bond is a kind of insurance meant to help protect the plan from losses caused by fraudulent and dishonest acts by plan officials. Here’s an example of a real life situation I encountered on this topic.  A business owner approached me saying that he was looking for a new 401(k) provider because he had become aware of some malfeasance within the retirement plan.  His employee who handled the payroll was rather diligent in withholding the employees’ 401(k) deductions from their paychecks but was equally as diligent in depositing these deductions into an account she had setup in her own name.  She did this for over two years before getting caught.  In this situation, the ERISA Bond helped to offset the loss to the plan from this fraudulent act.
As mentioned above, ERISA Bond coverage is a requirement of sponsoring a 401(k) Plan.  ERISA requires that each person who has the authority to handle the funds within the plan must be bonded in an amount equal to no less than 10% of the total plan assets.  There are a few exceptions to this rule.  First, there is a minimum coverage amount of $1,000.  This often comes up in the case of startup 401(k) Plan.  Second, there is a cap on the ERISA Bond of $500,000 in coverage.  Therefore, plans with more than $5 million in assets can be bonded for $500,000 and still remain in compliance with ERISA regulations.  Finally, there is an  exception to this rule is for organizations that offer employer securities (i.e., company stock).  The coverage cap for these plans is $1 million.
If you noticed above, I mentioned that the ERISA Bond offers protection from losses due to fraudulent activities and the policy helps insure the plan against these losses. Therefore, the plan is being insured but what about the fiduciaries overseeing the 401(k)? Fiduciary Liability Insurance is meant to provide a level of insurance for the individual fiduciaries overseeing the plan from personal liability. Since it is the responsibility of the fiduciaries to run the plan in the best interests of the participants, a breach in this duty carries with it the potential of personal liability. For example, plans that charge unreasonable fees to the participants and/or offer investment options with substandard performance histories might show that the 401(k) committee had not performed their fiduciary duty to run the plan in the participants’ best interests. Therefore, the participants could seek legal remedies against the fiduciaries for neglecting to oversee the plan with their best interests in mind. This insurance policy helps to protect the employer and the fiduciaries from liability.
The main differences between the ERISA Bond and Fiduciary Liability Insurance are the requirements and the liabilities covered.  First, the ERISA Bond is required as a condition of offering a tax-advantaged plan while Fiduciary Liability Insurance is an option.  Next, the ERISA Bond covers losses caused by  fraudulent activities by plan officials whereas Fiduciary Liability Insurance covers the fiduciaries who are found to be deficient in their roles of properly overseeing of the 401(k) assets.  As stated above, the ERISA Bond insures the plan while Fiduciary Liability Insurance insures the individuals overseeing the plan in a fiduciary capacity.
Join us for next week’s class when we discuss Benchmarking Your Current Providers to make sure the retirement plan is performing competitively and for a reasonable fee.…

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