Insurance Coverage Needs for Your Retirement Plan

Insurance Coverage Needs for Your Retirement Plan

Do you have a fidelity bond for your retirement plan? If not, your plan could have serious consequences with the Department of Labor (DOL). It is imperative when setting up a new plan that a bond is obtained as soon as the plan is established, and maintained throughout the life of your plan.  All qualified retirement plans are required to maintain a fidelity bond.  This is required by the Employee Retirement Income Security Act of 1974 (ERISA) as well as under DOL regulations.  A fidelity bond is an insurance policy that is meant to protect the plan from losses due to fraud, dishonesty or illegal actions by fiduciaries.  Fiduciary insurance actually protects the fiduciaries who may be liable to the plan participants even if they are not at fault. A fiduciary is someone whose trusted role is to act in the best interest of the 401(k) plan participants and their beneficiaries. They can be held personally liable for losses to the plan.

General rules for the amount of fidelity bond required:

The fidelity bond should cover 10% of the value of the total plan assets.  The minimum bond value is $1,000.  For the first year of a plan, the bond amount is based on the estimated amount of assets that may be handled by the plan for the year. Typically, the maximum bond amount required is $500,000 but there are exceptions that can require a higher bond amount. Some clients even prefer to optionally elect higher bond coverage.

When your plan might need an audit:

If a small plan does not invest 95% of the assets in Qualifying Plan Assets, and they want to avoid an annual plan audit, they must obtain a fidelity bond that is equal to the value of the non-qualifying plan assets. Some examples of assets that are not Qualifying Plan Assets are limited partnerships, artwork, collectibles, mortgages, real estate or securities of “closely-held” companies.

Annual maintenance of your bond:

Once your fidelity bond is in place, you must continue to review it annually. Some bond providers may have the option to set your bond up on an auto-increase feature.  If that cannot be set up, an annual evaluation with your provider should be scheduled.  The amount of your fidelity bond is required to be reported on your annual Form 5500 filing.  Failure to have a fidelity bond or having a bond that is less than 10% of the plan assets could raise a red flag to the Department of Labor (DOL).  This could cause the DOL to look more closely at the plan or lead to a plan audit.

Plans are permitted to purchase fiduciary liability insurance in addition to their fidelity bond.  Fiduciary liability insurance is to protect their fiduciaries, not the plan.  Since these insurance policies are not written specifically to protect the plan from losses due to dishonest acts, they do not meet the ERISA bonding requirement and cannot be reported on the Form 5500 as a fidelity bond.

How you can obtain a fidelity bond:

In order to satisfy the requirements of ERISA, a fidelity bond for retirement plans must be issued by a surety company that holds a grant of authority from the Secretary of Treasury as an acceptable surety on federal bonds. Information concerning the list of approved sureties and reinsures is available here. The bond should be held in the name of the retirement plan, not the company name, as those are the assets being protected. 

If you are in need of a bond, we advise reviewing the website of the Bureau of the Fiscal Service of the US government.  They have a certified list of companies that provide surety bonds.

Retirement plans have many fiduciary responsibilities. ML&R Wealth Management is here to assist you. Contact us today for guidance on questions with your retirement plan.

About Author

Pam Raffaele

Efficient retirement plan management takes patience and attention to every little detail. Pam Raffaele brings her expert knowledge and years of experience to help your company maintain its professional outlook. Pam joined our team in 2006 and brings with her experience in complex plan design and compliance testing as well as an extensive background in plan record keeping and retirement planning conversations.

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