Navigating the lingo of company-sponsored retirement plans can feel like a maze, but understanding the basics of ERISA, the Employee Retirement Income Security Act of 1974, illuminates a lot. ERISA is a federal law that sets the standards for managing employer sponsored retirement plans, like the 401k. Read on to cut through the legal jargon and focus on the key aspects of ERISA that every plan sponsor needs to know.
Protecting Participants and Beneficiaries
When employees participate in employer-sponsored retirement plans, like 401k’s, their interests are protected by the high standards of ERISA. Specifically, ERISA regulates five aspects of employer-sponsored retirement plans: administration, fiduciary responsibilities, reporting and disclosure requirements, and plan funding, to ensure that participants and their beneficiaries receive the maximum benefits on the path to secure older ages. Employee benefit experts at Vita offer this summation of how ERISA addresses fiduciary responsibilities, and other key elements of employer-sponsored plans:
Fiduciary Responsibility: ERISA imposes fiduciary duties on those who manage and administer 401(k) plans, including plan sponsors, trustees, administrators, and investment managers. These fiduciary responsibilities include acting solely in the best interests of plan participants and beneficiaries, prudently managing plan assets, diversifying plan investments, and ensuring the payment of reasonable plan expenses.
Reporting and Disclosure: ERISA requires plan administrators to provide participants with important information about the plan, including plan features, investment options, fees and expenses, and their rights and responsibilities under the plan. Participants must receive regular statements detailing their account balances and transactions, as well as summary plan descriptions outlining key plan provisions.
Vesting and Participation: ERISA sets rules regarding eligibility and vesting in 401(k) plans. It requires plans to offer participation to eligible employees and sets guidelines for when employees become vested in their accrued benefits, including employer matching contributions.
Although ERISA is a complex set of rules, retirement plan sponsors and their chosen administrators must follow them carefully to ensure that retirement savings are handled appropriately and available when needed. ERISA places a great deal of emphasis on making sure participants receive timely and necessary plan information. Detailed reporting and disclosure requirements are intended to keep participants well-informed and aware of their rights within the plan. Funding standards and legal remedies for participant recourse are also specified by ERISA:
Plan Funding: ERISA establishes minimum funding standards for defined benefit pension plans to ensure that these plans have sufficient assets to meet their obligations to participants. While 401(k) plans are typically not subject to the same funding requirements as defined benefit plans, ERISA does require that plan assets be held in trust and used exclusively for the benefit of participants and beneficiaries.
Legal Remedies: ERISA provides participants and beneficiaries with legal remedies and avenues for recourse if they believe their rights under the plan have been violated. This includes the ability to file lawsuits to recover benefits, enforce their rights under the plan, or hold fiduciaries accountable for breaches of their duties.
ERISA Bonds Protect Plan Assets
ERISA further protects retirement plan assets by requiring ERISA Fidelity Bonds.
All individuals with a role in handling the company-sponsored retirement plan must, by law, have an ERISA Fidelity Bond. The purpose of an ERISA Bond is to protect “the assets in the plan from misuse or misappropriation by the plan fiduciaries.” According to the Department of Labor: “Fraud or dishonesty includes, but is not limited to, larceny, theft, embezzlement, forgery, misappropriation, wrongful abstraction, wrongful conversion, willful misapplication, and other acts.” Failure to obtain or renew an ERISA Bond poses significant risks, including triggering audits and investigations and being held personally liable for losses that would have been covered by the ERISA bond. Not having coverage is a red flag:
Failure to carry a bond may result in a DOL investigation and/or liability exposure for the individuals responsible for your 401(k) plan. Not purchasing and maintaining a sufficient ERISA fidelity bond has serious consequences. Not having this required coverage can be a red flag to the DOL that they need to take a closer look at the plan. You are not only at risk for a DOL audit, but there are citations associated with not having this required coverage.
ERISA Bond vs Fiduciary Liability Insurance?
An ERISA Bond is not the same as fiduciary liability insurance. While ERISA bonds are required by law to protect retirement plans, fiduciary liability insurance is an important risk management practice for plan sponsors and other fiduciaries:
The Fidelity Bond protects the plan and its participants, while Fiduciary Liability Insurance typically protects the plan’s fiduciaries from claims of a breach of fiduciary responsibilities. This insurance is not required by ERISA, but many fiduciaries seek to have this coverage for their own protection. Without this coverage, a fiduciary could be personally liable for losses resulting from their fiduciary failures. The cost of the insurance can be paid by the employer or the fiduciary and not the plan assets. Examples of a breach of fiduciary duty may include:
- Errors in administering plans such as improper enrollment or termination
- Providing poor or negligent advice on investments within the plan
- Improper denial or change in benefits
- Failures in the selection and monitoring of third-party service providers
One thing retirement plan sponsors do not have to do is shoulder their fiduciary risks alone: Colonial Surety Company makes it efficient and affordable to add Fiduciary and Cyber Liability Insurance to the ERISA Bond, 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, Cyber Liability Insurance provides breach response services, ensuring the implementation of obligatory investigation and notification procedures and offering coverage against lawsuits and regulatory actions.
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Need help? Our knowledgeable, New Jersey based ERISA service team is available Monday-Friday, 8:30am-5:30pm EST at 888-383-3313 and via email: erisadept@colonialsurety.com.
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.