Sooner or later, regulators discover ERISA Bond failures, and in addition to penalties, audits and investigations can follow. Anyone, with any role in handling a company sponsored retirement plan, must, by law, have an ERISA Fidelity Bond. Neglecting to obtain and renew the bond from a Treasury-listed surety is a costly error.
Do Small Business Owners Need ERISA Bonds?
ERISA Fidelity Bonds are required by the U.S. Department of Labor for the protection of employer sponsored retirement plans and participants, and “any individual whose duties or activities could result in a loss of plan funds or property as a result of fraud or dishonesty is required to be covered.” Although there are a few ERISA Bond exemptions, small businesses are not generally exempt. However, the American Society of Pension Professionals and Actuaries (ASPPA) has observed that sometimes small business owners unwisely believe they do not need to bother obtaining ERISA bonds, since: “the vast majority of the assets are allocated to the owner’s account, so the owner…would be the only one seriously hurt by any fraud or dishonesty,” or, “the owner is the only person handling funds, so there wouldn’t be any fraud or dishonesty in the first place.” As ASPPA points out, disregarding ERISA Bond requirements in hopes of not being caught, is a very foolish move for any business sponsoring a retirement plan:
First, there is no exception in the bond rules for plans where the likelihood of fraud or dishonesty is small or whose assets are skewed overwhelmingly toward the owner. Unless you meet one of the exceptions…your plan needs a bond. Second, the annual Form 5500 series has a question about whether the plan is covered by a bond and how much the bond is….It is naive to think that one can go without a bond and not have it come to the attention of the regulators. It’s right there on the Form 5500 for anyone to go online and see.
Plan sponsors are wise to keep in mind that ultimately, the disruptions caused by not having an ERISA bond far outway the “bother” of obtaining one. For example, according to Eisner Amper, the risks associated with failing to meet ERISA Bond requirements “include, but are not limited to”:
- Failing to report a sufficient bond on the Form 5500 can trigger a plan audit.
- It is considered as an unlawful act under ERISA if any person “receives, handles, disburses or otherwise exercises custody or control of plan funds or property” without being properly bonded.
- Plan fiduciaries can be held personally liable for losses that could have been covered by a fidelity bond.
Good To Know: ERISA?
The Employee Retirement Savings Act–aka ERISA–was signed into law in 1974. Since then, “the 401(k) quickly became a household name,” governed by high fiduciary standards, including the “robust reporting and disclosure requirements,” which ERISA spells out. The emergent opportunities to save through 401k plans have provided millions of workers with increased retirement confidence, and most plan sponsors have diligently shouldered their responsibilities. Nonetheless, given the high fiduciary standards associated with plan sponsorship, ERISA litigation has also proliferated over the years, as attorney Diane Dygert of Seyfarth points out:
Breach-of-fiduciary-duty claims involve allegations that plan fiduciaries did not act in the best interests of the participants. This can include failing to prudently select and monitor investment options, not diversifying plan assets, or engaging in conflicts of interest, she said.“Under ERISA, fiduciaries must act solely in the interest of plan participants and beneficiaries, with a duty of prudence and loyalty….If they fail in these duties, they can be held personally liable for any losses to the plan.”
The rise of ERISA litigation makes it essential for plan sponsors to understand the difference between an ERISA fidelity bond and fiduciary liability insurance. Required by law, ERISA bonds protect the plan and participants. Though not mandated by the government, fiduciary liability insurance is the only coverage that protects plan sponsors from being held personally responsible for ERISA breaches.
Best Practice: Compliance and Protection
Colonial Surety Company makes it efficient and affordable for retirement plan sponsors to add Fiduciary and Cyber Liability Insurance to their ERISA Bonds, ensuring protection for the plan, the company and the plan sponsor. When armed with our cost-efficient Fiduciary+Cyber Liability Insurance, if you face claims of alleged or actual breaches of duty in connection with the employee retirement plan, you’ll be protected with defense costs and penalty limits up to $1,000,000. Plus, the Cyber Liability Insurance provides breach response services, ensuring implementation of obligatory investigation and notification procedures, and offering coverage against lawsuits and regulatory actions.
Ready to let us protect you? Just take a moment and get your quote for affordable and complete coverage for plan sponsors:
Fiduciary and Cyber Liability Insurance
Serving customers since 1930, Colonial Surety is the trusted source for the pension industry to secure legally required ERISA bonds, fiduciary liability insurance and cyber-liability insurance. We help safeguard plan sponsors, pension professionals and financial advisors — and keep their businesses compliant — with pain-free, efficient, and friendly service every time. Colonial Surety Company is rated “A Excellent” by A.M. Best Company, US Treasury listed and in business all across the country.