Protection Gaps: 5 Ways Retirement Plan Sponsors Are More Exposed Than They Think
You checked the ERISA bond box on Form 5500. You hired a TPA. You have business insurance. Most plan sponsors assume that adds up to full protection, and many are mistaken.
Fiduciary duty covers far more than the fund lineup, and so does fiduciary risk. Here are five protection gaps that leave sponsors exposed, and how to close each one. (Our thanks to The 401(k)ouple podcast, where Colonial Surety Company’s Michael Bonfante explored these issues.)
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1. The Form 5500 bond question gets a checkmark, not a check
Every year, Form 5500 asks whether your plan was covered by a fidelity bond. Too often, the box gets checked without anyone confirming the coverage is real and compliant. Bonfante calls this one of the most common misconceptions he sees among small business owners.
A frequent cause is an ERISA endorsement added to a commercial crime or business policy by an agent unfamiliar with ERISA rules. Some endorsements work. Many don’t name the plan, or they protect the business instead of plan participants. That kind of gap can surface during a Department of Labor (DOL) audit.
A compliant ERISA fidelity bond generally:
- Names the plan as the insured
- Covers every person who handles plan funds
- Has no deductible on the required coverage amount
- Is issued by a surety on the U.S. Treasury’s approved list
2. Hiring a fiduciary service provider doesn’t transfer your duty
Outsourcing to a 3(16) plan administrator or a 3(38) investment manager can lighten your workload, but not your responsibility. As the plan sponsor, you must still prudently select and monitor the providers you hire. In Bonfante’s words, “you’re never fully relieved of your fiduciary responsibilities, and everyone can be sued in the equation.”
Fiduciary duty also extends well beyond investments, to fees, service providers, participant communication, and daily operations. Routine slips can create real exposure:
- Late or incorrect Form 5500 filings
- Late deposits of employee salary deferrals
- Missing required plan amendments after a law change
- Not following the plan’s own terms
- Incomplete or incorrect participant disclosures
3. An ERISA bond protects participants, not the sponsor
Sponsors often ask about their “fiduciary bond,” but that term actually refers to two separate products which confuse many. Knowing the difference determines whether you’re protected when a claim lands on your desk.
The bond amount is generally at least 10% of plan assets, with a $1,000 minimum and a $500,000 cap. The cap rises to $1 million for plans holding employer securities and for pooled employer plans. Plans that hold harder-to-value assets, such as real estate or collectibles, may need higher coverage tied to those assets.
The bottom line: an ERISA bond won’t pay a dime toward your legal defense if you’re sued over a missed filing or a document error.
4. Defense costs alone can sink a small business
A fiduciary claim typically begins with a letter from a plaintiff’s attorney. Defending it requires an experienced ERISA attorney, often costing well over $500 an hour. In Bonfante’s experience, defense expenses add up fast: $364,000 for an ERISA claim, with total claim costs averaging close to $1 million.
Without fiduciary liability insurance, those costs fall on the business and the owner personally. By comparison, coverage for a whole year with the right insurer can cost only about as much as one legal consultation.
5. Your current cyber policy may not cover your plan
The DOL treats cybersecurity as part of a fiduciary’s job, and provides detailed related guidance for retirement plan sponsors. Specifically, for example, plan sponsors are instructed to “Have an effective business resiliency program addressing business continuity, disaster recovery, and incident response.”
As Bonfante further reminds retirement plan sponsors, cyber liability insurance can be very helpful, but only if the retirement plan is explicitly covered by it. Unfortunately, many sponsors only find out the retirement plan was left out after a claim is filed. Additionally, not all cyber liability insurance reimburses money lost to social engineering, such as a fake distribution request. That loss may be excluded or capped at a low sublimit. Read your policy carefully for coverage details.
Good To Know
Think your ERISA coverage is fine? Bonfante recommends asking yourself these three questions as you assess protection needs:
- Why do I believe my fiduciary exposure is low?
- What insurance protects both my business and my retirement plan?
- How much am I willing to pay out of pocket if a claim is filed?
Also watch your data. Outdated participant records, bad addresses, and missing beneficiary forms seem minor, but they can lead to fiduciary breach claims, which put the owner’s personal assets at risk.
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