Plan Sponsor Quick Tips: Maintaining a Fidelity Bond

Each Monday 401kBasics posts a new tip as a part of our series “Plan Sponsor Quick Tips”. This series is designed to assist plan sponsors in filling their fiduciary role and running their retirement plan efficiently. Your feedback or suggestions on future articles is welcome. Be sure to read our first article of our series, which is about getting acquainted with the plan documents.

A fidelity bond is an insurance contract in which the issuing agency agrees to pay sums up to the bond limit to reimburse the employer or plan for losses created by the actions of those individuals who handle plan assets or have other discretionary authority over the plan and its assets.

Plan Sponsors have an end of year duty in reviewing the adequacy of the plan’s fidelity bond, which is required by the Department of Labor. Below is the a summary of the bond guidelines:

  • A fidelity bond is required to protect the assets in the plan from misuse by the plan’s fiduciary. Therefore the first step for a plan sponsor is to understand which individuals are in a position where they could misuse plan assets. Generally these would include people who have physical contact with plan property and assets, those with power to transfer or negotiate plan property for a price, anyone with power to disburse funds and sign checks, and those with decision making authority over any individual described above.
  • The fidelity bond must be no less than 10% of plan assets with a minimum of $1,000 and a maximum of $500,000. As with many aspects of ERISA, there are important exceptions, one of which pertains to plans with employer securities. The Pension Protection Act of 2006 increased the maximum bond amount to $1 million for retirement plans that hold employer stock or other employer securities. A retirement plan would not generally be considered to hold employer stock or other employer securities if these assets are part of a broadly diversified group of assets such as mutual funds. This new bonding provision was effective for plan years beginning on and after January 1, 2007.
  • There can be serious consequences for not purchasing and maintaining a sufficient ERISA fidelity bond. Since the bond is reported on the form 5500, not having one could raise a red flag to the DOL leading them to take a closer look at your plan–also known as an audit!

For more information on the fidelity bond visit the Department of Labor website at http://www.dol.gov/ebsa/regs/fab2008-4.html.

This site is for entertainment purposes only. 401kbasics and it’s authors are not financial advisors and no information found on this site should be construed as financial advice.

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4 Responses to Plan Sponsor Quick Tips: Maintaining a Fidelity Bond

  1. Bradley says:

    Many financial managers don’t understand that these are absolutely required. If you don’t have the coverage, you are in voilation. In our practice we purchase or recommend the purchase of ERISA bonds regularly. We have received superlative service from the surety company with which we do business. I recommend suretyone.org. Very easy people to work with, excellent customer service.

  2. 401kBasics says:

    This is very true. Companies assume that because it’s a “yes” or “no” question on the Form 5500, its optional. Furthermore, companies often times fail to keep the amount up to date with the requirements–10% of plan assets.

  3. Marie Chelle says:

    Thank you very much my friend, you are very kind in sharing this useful information with? others…. The details were such a blessing, thanks.

  4. C. Gonzalez says:

    This is accurate information, except for ONE small addition. As of 2008 the maximum threshold is $1,000,000 if the plan contains any employer issued securites (like an ESOP). Yes, correct, these are a ‘must have’. It is ILLEGAL not to have one. Generally, these bonds are fairly easy to get UNLESS the plan has significant levels of non-qualifying assets, cover ESOPS, or are multi-employer or labor union plans. If it is “outside of the box”, most insurers will just decline them. At the risk of a plug, I have to recommend ERISA-bonds.com. The organization offers superlative service and handles all of those difficult bond placements as well as the simple ones.

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