Fidelity Bond vs. Fiduciary Liability Insurance by Janelle Sotelo, Account Manager, Precept RPS
In today’s ever-changing world of the retirement plan market, plan sponsors are asking if they need a Fidelity Bond or Fiduciary Insurance or both. The two may sound similar but there are big differences between them.
A Fidelity Bond helps make a plan whole from losses resulting from dishonest or fraudulent acts by employees in the handling of plan participants’ money or securities. All qualified retirement plans must obtain an ERISA fidelity bond.
On the other hand, fiduciary liability insurance protects plan fiduciaries from breaches of their fiduciary duty under ERISA.
Fidelity Bond
The Pension Reform Act of 1974 (more commonly known as ERISA – Employee Retirement Income Security Act) states that the funds of pension or profit sharing plans must post a bond for 10 percent of the amount handled. As an example, a 401(k) Plan with $5 million in funds must post a bond of $500,000. ERISA required bond coverage is limited to protection against loss through fraud or dishonesty. Bond terms may exceed one year, which may result in having to adjust the amount at the beginning of each plan year to meet the 10 percent of plan asset minimum. The typical fidelity bond coverage is for three years.
Commercial Blanket Fidelity Bond Rates for Pension Plan Bonds
|
Bond Amount
|
3 – Year Prepaid
|
Bond Amount
|
3 – Year Prepaid
|
|
$25,000
|
$129
|
$200,000
|
$303
|
|
$50,000
|
$179
|
$250,000
|
$327
|
|
$75,000
|
$221
|
$300,000
|
$367
|
|
$100,000
|
$250
|
$350,000
|
$387
|
|
$150,000
|
$277
|
$400,000
|
$407
|
|
$175,000
|
$290
|
$500,000*
|
$450
|
*Maximum bond amount (regardless of Plan asset size).
For plan years beginning after January 1, 2007, the Pension Protection Act of 2006 (PPA) increases the maximum fidelity bond amount to $1,000,000 for plans that hold company stock.
What are the consequences if the DOL discovers a plan is not covered by a fidelity bond? The DOL alleging breach of the fiduciary of the plan can ask the court to:
· Order the owner to obtain the bond,
· Permanently bar him or her from serving as an ERISA plan fiduciary,
· Remove the current plan administrator,
· Appoint an independent trustee, or
· Impose penalties
Fiduciary Insurance
As a 401(k) plan sponsor, you have fiduciary responsibilities, duties and obligations imposed upon you by ERISA. According to ERISA, plan fiduciaries must act solely in the interest of the participants and beneficiaries of the plan. ERISA also mandated that fiduciaries may be personally liable for breach of certain responsibilities imposed upon them under the law. With the number of ERISA Civil Cases on the rise, adding fiduciary insurance coverage may be an important step for all plans to consider.
Fiduciary liability insurance provides protection to the sponsor employer and its officers, directors, and employees from their liability exposures arising from ERISA and the common and statutory law. Below is a chart on average premium rates:
|
Plan assets
|
Avg Premium*
|
|
$1,000,000 – $ 2,000,000
|
$800 – $1,000
|
|
$2,000,000 – $ 5,000,000
|
$1,000 – $1,200
|
|
$5,000,000 – $10,000,000
|
$1,300 – $2,000
|
*Premium based on $1,000,000 in coverage amounts.
(Source: naplia.com)
#1 by John O'Neill on March 2nd, 2009
Fid bond vs insurance