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.
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. You might think that your business has no exposure to liability risk, but think again. The company offering the retirement plan is ultimately responsible for its administration and cannot fully escape responsibility, even if it’s been turned over to a third-party provider.
Also, do not assume that you’re already covered against theft or financial loss through your other business insurance coverage, because 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 that all plans carry a bond that offers protection against theft, fraud and other deliberate dishonest acts committed by the fiduciary.
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.
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.
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.