What is a Fidelity Bond?
401(k) plan sponsors are required to purchase a fidelity bond to protect the plan against fraudulent or dishonest acts. Here are answers to common questions.
What is a fidelity bond?
A fidelity bond is a type of insurance required for those responsible for the day-to-day administration and handling of “funds or other property” of an ERISA (Employee Retirement Income Security Act of 1974) benefit plan such as a 401(k). The purpose of the bond is to protect the plan from losses due to acts of fraud or dishonesty including theft, embezzlement, larceny, forgery, misappropriation, wrongful abstraction, wrongful conversion and willful misapplication.
What are “Funds Or Other Property”?
“Funds or other property” refers to 401(k) plan assets. In addition to publicly-traded stocks, bonds, mutual funds, and exchange-traded funds, all employee and employer contributions are considered “funds,” whether they come in the form of cash, check or property.
Who must be covered by a fidelity bond?
Under ERISA, it is illegal to receive, disburse, or exercise custody or control of plan funds or property without having a fidelity bond in place. Therefore, anyone who handles or manages 401(k) funds must be covered by a fidelity bond. This includes anyone who has:
- Physical contact with cash, checks, or similar property
- Authority to secure physical possession of cash, checks, or similar property through access to a safe deposit box, bank accounts, etc.
- Authority to transfer plan funds either to oneself or a third party
- Authority to disburse funds
- Authority to sign or endorse checks
- Supervisory or decision-making authority over plan funds
This requirement is not just limited to plan managers and plan sponsor employees. Third party service providers that have access to the plan’s funds or exercise decision-making authority over the funds may also require bonding. This includes investment advisors and third-party administrators (TPAs).
How much coverage is required?
ERISA requires each person handling the plan to be covered for at least 10% of the amount of funds they handle. The coverage can’t be less than $1,000 or more than $500,000, (unless the plan includes employer securities, in which case the maximum amount can be $1,000,000).
The exception to the 10% rule applies to ‘non-qualifying plan assets” that may represent more than 5% of the plan’s total assets.
- Qualifying assets include items held by a financial institution such as a bank, insurance company, mutual funds, etc.
- Non-qualifying assets are those not held by any financial institution including tangibles such as artwork, collectibles, non-participant loans, property, real estate and limited partnerships.
Fidelity bonds have a minimum term of one year. Longer-term bonds will typically include an inflation provision so the value of the bond will increase automatically. The bond amount should be reviewed and updated as the plan assets increase or decrease.
Where can I obtain a fidelity bond?
The bond must be issued by an underwriter from an insurance company that is listed on the Department of Treasury’s Listings of Approved Sureties. These are companies that have been certified by the Treasury Department.
Fidelity bond application
During the application process, some plan information may be required. Common items the application will ask is the plan name, address, IRS plan number (ex. 001), and trustee information. Most of the items asked can be found under the administrative information section (usually second to last page) within the Summary Plan Description (SPD).
What happens if I don’t cover my plan with a Fidelity Bond?
The existence and amount of the plan’s fidelity bond must be reported on your plan’s annual Form 5500 filing. Not having a bond, or not having sufficient coverage based on plan assets, may trigger a DOL audit and may risk the plan’s tax-qualified status. Additionally, the plan fiduciaries may be held personally liable for any losses that may occur from fraudulent or dishonest acts.