The Name is Bond, Fidelity Bond

When you need someone to conduct a top-secret mission you call James Bond, but when you need to steer clear of running afoul ERISA law you need a different kind of bond, a fidelity bond.

Like James Bond himself, things are not always as they outwardly seem. A fidelity bond is in fact not a bond at all but rather an insurance contract. This insurance contract, in the context of 410(k) plans, protects plan assets from losses due to fraud, theft or dishonesty.

The Employee Retirement Income Security Act (ERISA), effective in 1974, is the law governing corporate retirement plans and it requires employers to purchase a fidelity bond to protect plan participants from malfeasance on the part of those who handle plan assets.

Simply having a fidelity bond, however, may itself be insufficient to claim compliance with ERISA. The Department of Labor requires fidelity bonds to be of sufficient size depending on the plan assets. Failure to have a sufficiently large fidelity bond can also raise the ire of the DOL.  

While certain exemptions exist, the general rule, applicable to most plans, is that a plan must have a fidelity bond in place that is 10% of the total plan assets. In most cases, the maximum bond size required by ERISA is $500,000, irrespective of plan size. Higher limits can be purchased but are not required for compliance with the law. The minimum allowable bond size is $1,000.

Most modern 401(k) platforms (and the companies that offer them) have various safeguards in place to prevent and/or identify fraudulent activity with regard to plan assets and contributions. Regardless of the effectiveness of precautionary measures, ERISA still requires a bond and DOL auditors take the bond requirement very seriously.

Failure to maintain adequate bond coverage invites a closer look by the Department of Labor, perhaps even culminating in a full plan audit or legal action should the plan fail to comply with the necessary corrective action. One such case in Michigan is even prominently cited on the Department of Labor’s official site (Chao v. Thomas E. Snyder and Snyder Farm Supply Inc. 401(k) Plan Civil Action No. 1:00CV 889, click here for the DOL’s official media release).

Continuing with the theme, we’ve compiled the top 007 reasons you should review your fidelity bond coverage regularly if you’re a plan sponsor/administrator.

001 – It’s the law. Ignorance is not a defense the DOL accepts and as a plan sponsor/administrator you are required to comply with the law and surround yourself with experts that can fill any gaps in knowledge. If you’re currently working with an advisor and are deficient in your fidelity bond, you may wish to reconsider the relationship.

002 – As a plan fiduciary you are required to act in the best interest of the plan's participants. Failure to maintain a sufficient bond can be considered a breach of fiduciary duty.

003 – A fidelity bond is easy to buy and relatively inexpensive. Insurance companies we work with typically offer contracts starting under $100 depending on bond size.

004 – Negative press from something so easily fixed can be detrimental to your business and unnecessarily tarnish a well-earned and respected reputation

005 – The DOL has the power to fine plans that are not in compliance with the bonding rule. Fines can be significantly more expensive than the appropriate size bond.

006 – In the event of fraud or other preventable, non-investment losses and in the absence of a fidelity bond, the firm and/or ownership could be held liable.

007 – It’s a simple, quick and inexpensive thing to get a fidelity bond of the right amount for your plan. The relatively small cost is well worth the price considering the peace of mind you get knowing your plan is complying with ERISA.

Fidelity bonds can easily be purchased through most insurance brokers. We can help you get in touch with insurance firms that offer fidelity bonds should you need assistance. Typically, bonding starts as low as $85 per contract and requires a simple one page application.