In 1974, the Employee Retirement Income Security Act (ERISA) was put in place to regulate employee benefit plans, including retirement investments. All plans subject to ERISA, such as 401(k) plans, must procure an ERISA fidelity bond, which protects plan assets from theft or wrongdoing.
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 handle plan funds.
Who needs to have an ERISA bond?
Anyone who "handles funds or other property" of an employee benefit plan must 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 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 disbursements
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, what you do and the plan-related actions you take are what matters most when it comes to fiduciary responsibility—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 bond (it's quite possible they already have one, especially if they're external).
401(k) plan service providers should also be bonded. Human Interest has obtained a fidelity bond that insures us against fraud. Between the bonds required of our clients’ plan administrators and the Human Interest bond, you’re ensuring that your 401(k) plan funds are well-protected.
How much coverage is required?
Each plan must obtain a fidelity bond in an amount equal to at least 10% of the amount of the plan assets.
Example: A company plan that has funds that total $1 million would require a fidelity bond of at least $100,000.
If you're not sure what your assets will be in the future because of a lack of prior year data (common for companies setting up their very first 401(k) plans), we recommend discussing your options with the surety company and ensuring that your bond contains auto-increase provisions to cover asset changes for the next few years, 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 approved by the Department of the Treasury. Human Interest has a few providers we recommend to our clients, but the choice is up to you. If you’re a Complete or Concierge client of Human Interest, we’ll procure a fidelity bond on your behalf as part of your service agreement.
How much does an ERISA fidelity bond cost?
For a new plan with assets less than $100,000, premiums are generally only about $100 per year. If a fidelity bond is included with your service agreement, your 401(k) provider may include it in their lump sum fees (by purchasing through a third-party provider on your behalf). In these cases, make sure to ask exactly how much the ERISA portion costs and whether they’re adding in any service or administrative fees in addition to the cost of the bond.
What about fiduciary liability insurance?
Unlike the legally required ERISA bond, fiduciary liability insurance is optional. This type of insurance protects both the business and its plan fiduciaries in the event that there’s a claim of fiduciary breach under ERISA. This is not protection for “bad actors,” but instead is meant to give plan fiduciaries protection related to unintentional fiduciary breaches that may occur when performing their duties. Since this coverage is not required, each business can decide for itself what approach to take, if any.
Plan Sponsors should take independent steps to validate the tax, legal, or accounting considerations of hiring any service provider for the Plan, obtaining guidance on any Plan document (or amendment thereto), and for any issues pertaining to design, implementation, or operation of a Plan.
Article ByVicki Waun
Vicki Waun, QPA, QKC, QKA, CMFC, CRPS, CEBS, is a Senior Legal Product Analyst at Human Interest and has over 20 years experience with recordkeeping qualified plans, along with extensive experience in compliance testing. She earned her BSBA in Accounting from Old Dominion University and is a member of ASPPA.