E- ERISA Bonds

E-1 Q: Must a bond be obtained for a 401(k) plan that has a bank trustee?

A: Yes. ERISA Section 412 requires that every person who handles or controls plan funds shall be bonded to provide protection to the plan against loss by reason of acts of fraud or dishonesty. Though most banks are exempt from the bonding requirement, individuals who handle or direct plan contribution deposits are not.


 

E-2 Q: Who must be covered by an ERISA bond? -TOP

A: Every fiduciary of a plan and anyone else (plan official) who handles or has authority to handle plan assets must be bonded. The bond must provide a direct right of access in favor of the plan in the event the insured plan official takes plan assets. The bond coverage amount must be at least 10 percent of plan as assets up to a maximum bond amount of $500,000. It is unlawful for, anyone who is required to be bonded to handle plan assets without a bond. Likewise, it is unlawful for any fiduciary to allow another plan official to handle plan assets without being properly bonded 


 

E-3 Q: What is the purpose of fiduciary liability insurance? -TOP

A: Fiduciary liability insurance is designed to protect fiduciaries who, although acting in good faith, violate the complex fiduciary rules as expressed in federal rules, regulations, and court rulings. Fiduciaries also need additional protection from liability for acts of co-fiduciaries, especially where a fiduciary should have known of the breach by a co-fiduciary and failed to remedy the breach.


 

E-4 Q: Must a bond be obtained for a 401(k) plan that has a bank trustee? -TOP

A: Yes. ERISA Section 412 requires that every person who handles or controls plan funds shall be bonded to provide protection to the plan against loss by reason of acts of fraud or dishonesty. Though most banks are exempt from the bonding requirement, individuals who handle or direct plan contribution deposits are not.


 

E-5 Q: What is the purpose of fiduciary liability insurance? -TOP

A: Fiduciary liability insurance is designed to protect fiduciaries who, although acting in good faith, violate the complex fiduciary rules as expressed in federal rules, regulations, and court rulings. Fiduciaries also need additional protection from liability for acts of co-fiduciaries, especially where a fiduciary should have known of the breach by a co-fiduciary and failed to remedy the breach.


 

E-6 Q: Are ERISA bonds required for 401(k) Plans? -TOP

A: ERISA regulations require that all pension plans, including 401(k) plans, be insured by an "ERISA bond" which has a payout equal to 10% of plan assets, or $500,000, whichever is less. The annual premiums for these special ERISA bonds (also called "fiduciary bonds") are very low, averaging approximately $200 per year or less (Example: a ERISA bond that covers a 401(k) plan with $100,000 in assets can cost as little as $100 per year--an ERISA bond covering plan assets of $1 million costs approximately $275 per year).


 

E-8 Q: Are ERISA bonds expensive? Where do employers get ERISA bonds? -TOP

A: ERISA bonds are not only inexpensive, but they are readily available and easy to purchase. Your business insurance agent is the best person to contact for ERISA bond coverage. Insurance companies that provide inexpensive ERISA bond coverage include:

CHUBB Insurance (contact local agent)
Hartford Insurance (888) 656-0817
Travelers Insurance (860) 954-2650
Maloney & Associates (760) 738-2610


 

E-9 Q: What's the difference between an ERISA bond, a fidelity bond, and a fiduciary bond? -TOP

A: No difference---an ERISA bond and fidelity bonds are essentially amended fidelity bonds. All three respond to claims involving dishonest acts on the part of asset investment advisors or the employer. The ERISA bond, sometimes referred to as a "fiduciary bond," pays claims directly to the plan participants. The fidelity bond pays the claims of the investment advisor which resulted from the dishonest acts of the investment advisor's employees.


 

E-10 Q: How do fidelity bonds and ERISA or fiduciary bonds differ from errors & omissions insurance? -TOP

A: The fidelity, ERISA and fiduciary bonds cover against losses due to a criminal act. The errors & omissions insurance provides employers and advisors with coverage against losses due to any actual or alleged negligent act or error committed while engaged in performing professional services.


 

E-11 Q: What's the difference between errors & omissions insurance and fiduciary liability insurance? -TOP

A: Errors & omissions policies protect the investment advisor and employer from losses due to an actual or alleged negligent act. In comparison, fiduciary liability insurance is a sub-category of errors & omission insurance, and provides additional coverage against a breach by any plan fiduciary. This coverage is not the same as provided by an ERISA bond because it does not insure against criminal acts on the part of a plan fiduciary.

 

 

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