LAST REVIEWED Jun 16 2020 8 MIN READ
By Liz Sheffield
In 1974, the Employee Retirement Income Security Act (ERISA) was put in place to regulate employee benefit plans, including retirement investments. All plans that are subject to ERISA, such as 401(k) plans, need an ERISA bond which protects plan assets from theft or wrongdoing. This requires that fiduciaries of an employee benefit plan—and every person who handles plan funds—be bonded.
If you're not clear on exactly what the term "fiduciary" refers to, read this article first: What is a 401(k) Fiduciary and Why Does It Matter?
Purchasing an ERISA bond should be a routine step of any 401(k) plan setup process, and we'll answer some common questions about why it exists and how it works below.
Why are ERISA fidelity bonds necessary for a 401(k)?
The main thing to understand is the rationale and importance behind securing an ERISA bond. Let’s start by looking at the Department of Labor’s definition of fiduciary responsibilities:
“The primary responsibility of fiduciaries is to run the plan solely in the interest of participants and beneficiaries and for the exclusive purpose of providing benefits and paying plan expenses.”
The core purpose of an ERISA bond is to protect the 401(k) plan assets against losses caused by fraudulent actions by people who hold fiduciary responsibility.
Human Interest obtains a separate bond that insures us against committing fraud. Between the bonds required of our clients’ plan administrators and the Human Interest bond, you’re ensuring that the 401(k) plan for your company is properly insured against fraud and employees and their funds are well-protected.
A few startups have let us know that as they go through various stages of fundraising, investors may ask if the company has a 401(k), and if so, whether the ERISA bond is set up for it as well. This seems to be a standard part of due diligence into a company's finances and liability.
Who needs to be bonded?
Anyone who "handles funds or other property" of an employee benefit plan is required to be bonded (unless covered by an ERISA exemption). It's unlawful for any person to “receive, handle, disburse, or otherwise exercise custody or control of plan funds or property" unless they are covered by the bond.
Handling funds or other property includes actions such as:
Processing cash, checks or similar items
Transferring funds from the plan
Disbursing funds or directing disbursement
Signing checks or other documents that guarantee payment
Holding decision-making responsibility for related activities
A word of caution: be sure the right people are covered by the ERISA bond. Fiduciaries are not just the people who are listed as such in the plan document. As reported by the Society for Human Resource Management, when it comes to fiduciary responsibility, what you do, and the plan-related actions you take are what matter most, not titles or formal designations.
What about my accountant?: If your accountant (whether in-house or external) handles funds or other property related to the employee benefit plan, they should obtain a separate ERISA bond as well, or be included on your company's -- and it's quite possible they already have one, especially if they're external.
What is covered by the ERISA fidelity bond?
An ERISA fidelity bond only protects the plan assets. It does not protect individual fiduciaries from litigation. To protect individual trustees some companies opt to purchase fiduciary liability insurance. Unlike the bond, liability insurance is not required by ERISA regulations.
How much coverage is required?
Each fiduciary must be bonded in an amount equal to at least 10% of the amount of the funds they handled in the prior year. For example:
A company plan has funds that total $1 million
There are three employees who have access and handle (approve, distribute, etc.) plan funds
Each of these three employees must be bonded for at least 10% of the $1 million (i.e., $100,000).
If you're not sure what your assets will be in the future because of lack of prior year data (common for companies setting up their very first 401(k) plans) we recommend putting $100,000 and buying the 5-year plan, which typically covers any future increases in assets automatically without additional costs.
Where can I buy an ERISA fidelity bond?
Bonds must be obtained from a provider ("sureties") approved by the Department of the Treasury.
Human Interest has a few providers we recommend to our clients, but the choice is really up to you, and we can provide some general guidance if you're unsure!
How much does an ERISA fidelity bond cost?
Human Interest works with many small business clients, and for a new plan with minimal assets, premiums are generally only about $100 per year. Other 401(k) providers may include it in their lump sum fees (by purchasing through a third-party provider on your behalf), so make sure to ask exactly how much the ERISA portion costs and whether they’re adding in any service or administrative fees on top of it.
What about fiduciary liability insurance?
Unlike the legally required ERISA bond, fiduciary liability insurance is optional. It can help cover company and personal assets against lawsuits. Since it's not mandated, it's less common, and businesses can choose whether or not they want the extra protection. Don't let providers scare you into thinking it's an absolute must.
Human Interest, as a company, has both an ERISA fidelity bond and fiduciary liability insurance, since we're unique in that we serve as a fiduciary for all of our clients' plans.
The bottom line? Make sure the people in your organization who handle your 401(k) plan investments act in a way that is in the best interest of participants and beneficiaries. This includes managing the investments and adhering to the plan terms so make sure to do your research and ask your 401(k) provider for help.
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Liz Sheffield has more than a decade of experience working in HR. Her areas of expertise are in training and development, leadership development, ethics, and compliance.