How to reduce risk using fidelity bonds and fiduciary liability coverage
By Craig Erickson
Managing an organization’s employee benefit and retirement plan comes with risks, and potential missteps can affect both the plan administrator and participants. To protect you from those risks, insurance companies offer fiduciary bond — often called fidelity bond — and fiduciary liability coverage. And while the two terms sound similar, there are distinct differences.
The term fiduciary, as it relates to retirement and benefit plans, refers to the person who has discretionary authority and control over the plan. This individual can be held personally liable for plan assets that are lost, but fidelity bonds and fiduciary liability can help mitigate the risk to an organization.
Assets and administrators at risk
The plan administrator can act, or fail to act, in ways that negatively affect the assets of the plan and cause financial peril to plan participants. Whether the harm caused by the plan administrator is deliberate or through negligence or mismanagement, monies are gone and plan participants bring lawsuits, creating additional financial burden to the company.
And if you think your business has no exposure to liability risk, think again. The company offering the retirement plan is ultimately responsible for its administration and cannot fully escape responsibility, even if the day-to-day management of the fund has been turned over to a bank, insurance company or other third-party provider.
If you assume you’re already covered against theft or financial loss through your other business insurance coverage, you’re not. Most business insurance plans specifically carve out coverage exceptions for this type of loss.
Plan administrators do, however, have insurance protection through fidelity bonds and fiduciary liability.
The Employee Retirement Income Security Act (ERISA) is the federal law that protects plan participants by setting minimum requirements for private-sector employee retirement plans. ERISA requires all plans to carry a bond that offers protection against theft, fraud and other deliberate dishonest acts committed by the fiduciary. This coverage is sometimes also referred to as an ERISA bond.
ERISA mandates that all retirement plans must carry $500,000 worth of coverage, or 10 percent of the plan’s asset value, whichever is lower. Plans that provide stock in the company as an investment option must carry a minimum of $1 million in fidelity bond coverage. The good news is that fidelity bonds are affordable, as theft and other deliberate acts are relatively rare.
However, this isn’t the sort of coverage you get from just any insurance broker. Under Circular 570, the Department of Treasury has a listing of approved sureties, which are the only valid sellers of such bonds. Read further here.
Unlike fidelity bonds, fiduciary liability is voluntary coverage — but it is a good idea for companies offering retirement plans. This insurance protects the fiduciary and the company against noncriminal mismanagement and breach of fiduciary duties against what could be very expensive lawsuits. Fiduciary liability covers such failures as inadequately funding a plan, imprudent investment of assets, poor selection of third-party service providers and other forms of administrative error.
Because this type of asset mismanagement is more common than theft, fiduciary liability is somewhat more expensive than fidelity bonds. However, your company and fiduciaries will, in all probability, spend less on the insurance than it would on the legal and court costs associated with defending your company and fiduciaries against retirement fund mismanagement litigation. Items to consider when inquiring about fiduciary liability insurance include: annual premiums, amount of coverage desired, amount of deductible, how the deductible is charged (when the claim is made or only if there is a settlement or judgment) and whether the coverage is reduced by legal fees incurred in defending the claim. Consult your lawyer and run the numbers with your accountant and insurance provider before making a decision.