Quick Summary
Most 401(k) plans must carry an ERISA fidelity bond that protects the plan from theft or fraud by people who handle plan money. Coverage must equal at least 10% of plan assets, with a $1,000 minimum and, in most cases, a $500,000 maximum. The bond is different from fiduciary liability insurance, which is optional. Because plan assets grow, coverage should be checked every year, and an automatic increase rider can help.
Among the requirements that come with sponsoring a 401(k), the ERISA fidelity bond is one of the easier ones to overlook. It is usually inexpensive, it rarely comes up in day-to-day plan operations, and many owners do not know they need one until their Form 5500 preparer asks about it.
Yet most 401(k) plans are required to have one, and many plans that have a bond do not have enough coverage.
What an ERISA fidelity bond is
An ERISA fidelity bond protects the plan against losses caused by fraud or dishonesty, such as theft, embezzlement, or forgery, by people who handle plan funds. It is required by section 412 of ERISA.
The bond protects the plan and its participants. It does not protect the business or the individuals covered by it.
Who must be covered
ERISA requires every fiduciary, and every person who handles plan funds or other plan property, to be bonded. "Handling" is defined broadly. It generally includes anyone with authority to:
- Transfer plan funds or sign checks on plan accounts
- Make or approve deposits
- Approve or authorize distributions and loans
- Direct the investment of plan assets
In a small business, that often includes the owner, officers, and payroll or HR staff who submit contributions or approve distributions.
How much coverage is required
The bond must cover at least 10% of the plan assets handled, measured as of the beginning of the plan year. The minimum bond is $1,000 per plan. The maximum required amount is generally $500,000 per plan, or $1,000,000 for plans that hold employer securities.
For example, a plan with $2 million in assets at the start of the year generally needs at least $200,000 of coverage. A plan with $8 million would hit the $500,000 maximum, unless it holds employer securities.
Fidelity bond versus fiduciary liability insurance
These two are often confused, but they protect against different things.
An ERISA fidelity bond protects the plan against dishonest acts by people who handle plan money. It is required by law.
Fiduciary liability insurance protects fiduciaries against personal liability for breaches of their fiduciary duties, such as claims of imprudent investment selection or excessive fees. It is optional.
Having one does not satisfy the need for the other. Many sponsors carry both.
Requirements for the bond itself
A bond that satisfies ERISA must meet several conditions:
- It must be issued by a surety company on the U.S. Treasury Department's list of approved sureties, known as Circular 570.
- The plan must be named as the insured.
- There can be no deductible on the required coverage amount.
A general business crime policy may not meet these requirements unless it is specifically written to satisfy ERISA.
Keeping coverage current
Because the required amount is tied to plan assets, a bond that was adequate when the plan started may fall short as the plan grows. Two practical steps help:
- Look for an inflation guard or automatic increase rider. Some bonds automatically increase coverage to meet the ERISA requirement as plan assets grow.
- Review coverage each year. The plan's Form 5500 asks whether the plan was covered by a fidelity bond and the amount, so this is a natural time to check.
The small plan audit waiver
Plans generally covered as small plans can avoid the cost of an annual independent audit if certain conditions are met. One condition involves the type of assets the plan holds. If more than 5% of plan assets are in certain non-qualifying assets, the bond for those assets may need to cover their full value. Most 401(k) plans holding mutual funds through a recordkeeper hold qualifying assets, but plans with unusual investments should confirm their bond meets this condition.
What happens if you do not have one
A plan without the required bond is out of compliance, and the Form 5500 question about bonding makes the gap visible to regulators. More importantly, the plan would have no protection if someone stole from it.
Where to get a bond
ERISA fidelity bonds are available through insurance agents and specialty providers, and some plan service providers can help arrange one. Premiums for small plans are typically modest. When you request a quote, have ready the plan's asset value as of the start of the plan year, the roles of the people who handle plan funds, and whether the plan holds employer securities or other unusual assets.
Want a second look at whether your plan's bond is adequate? Brian Williams, CPFA®, of Northshire Consulting LLC | Registered Investment Advisory Firm meets with business owners to review plan compliance basics. Call 203-401-6062, email bwilliams@northshireconsulting.com, or visit northshireconsulting.com to schedule a plan review.
Frequently asked questions
Does the fidelity bond cover investment losses?
No. The bond covers losses from fraud or dishonesty. It does not cover market losses or poor investment decisions.
Can one bond cover more than one plan?
Yes, as long as each plan is named and each has at least the coverage it is required to have.
Does a solo 401(k) need a fidelity bond?
Plans that cover only the business owner, or the owner and spouse, are generally not subject to this ERISA requirement.
This material is for educational purposes only and is not individualized investment, tax, or legal advice. Advisory services are offered through Northshire Consulting LLC | Registered Investment Advisory Firm.