[co-author: Tommy Rogers]

As you may be aware, Employee Retirement Income Security Act (ERISA) fidelity bonds and fiduciary liability insurance are not the same. Both serve to mitigate risk for fiduciaries, and are critical aspects of an employee benefits plan. The difference between the two lies in the risks that they cover. Are you looking to protect your employees from criminal acts or the company from legal liability?

Another important difference is that fidelity bonding is required by ERISA, but fiduciary liability insurance is not. ERISA states that all fiduciaries of employee benefits plans, and every person who comes into contact with plan assets, be bonded.  ERISA fidelity bonds (also referred to as surety or fiduciary bonds) are required by law and, if invoked, cover any plan losses that result from fraud or dishonesty. If money disappears, the bond will reimburse the loss.

ERISA requires a fidelity bond for all individuals that handle an employee benefits plan, including 401(k) plans. However, there are exemptions. Exemptions apply to church plans and government plans, or plans that are completely unfunded. Benefits that are paid from an employer’s general assets are considered “unfunded.” Additionally, insured welfare plans where no one handles funds or other property of the plan and solo 401(k) plans are not subject to the fidelity bond requirement.

ERISA fidelity bonds must be equal to at least 10% of the plan funds that a fiduciary handles. There is a minimum bond of $1,000 per plan with a maximum of $500,000 in bonding per plan. However, for plan fiduciaries of plans holding employer securities, the maximum required bond is $1,000,000.

In contrast, fiduciary liability insurance protects the company from legal liability that arises from the sponsorship of a plan. If the company is held liable, the policy will pay the defense costs and judgments against the company. Importantly, this coverage includes not only retirement plans, but health and other employee welfare plans. It is not required by law and will not cover illegal or fraudulent acts.

Without fiduciary liability insurance you and your company can be held personally liable for a breach of fiduciary duties. These claims are almost always very costly. Not only are the costs of going to court and defending yourself high, but the chances of losing or having to settle are also incredibly high. As a general rule, there doesn’t have to be an actual loss for fiduciary liability insurance to take effect. Without fiduciary insurance, an accusation can cripple an ill-prepared business.

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