Don’t Get Caught Without It: The ERISA Fidelity Bond Mistake That Can Cost You Personally

We have hammered this point in previous blogs, and we are going to hammer it again, because the stakes are simply too high to soft-pedal. If you sponsor a defined benefit plan, a defined contribution plan, or you act in any capacity as a plan fiduciary, you had better make absolutely certain that an adequate ERISA fidelity bond is in place. This is not a suggestion. It is not a best practice. It is federal law, and the people who ignore it tend to find out the hard way.

So picture the scenario. The Department of Labor’s Employee Benefits Security Administration (EBSA) opens an audit of your plan, and the bond isn’t there. What happens next?

Where no plan loss has occurred, the responsible fiduciary still walks into trouble. At minimum, that party runs the risk of being assessed the “twenty percent fiduciary penalty” under ERISA Section 502(l). You read that correctly. A penalty can attach even when no participant lost a dime, simply because the required protection was missing.

Where a fiduciary breach has actually caused damage to the plan, the situation is far worse. The failure to carry an ERISA bond is a federal code violation standing entirely on its own, independent of the underlying breach. You are now defending two problems instead of one.

Here is the part that catches people off guard. Failure to purchase ERISA fidelity coverage, and thereby leaving the plan unprotected against an act of dishonesty or a fiduciary breach by an individual who should have been bonded, can spread liability for those acts outward. A plan sponsor, a member of management, or any other party serving in a fiduciary role may be pulled into the exposure even if that party bore no fault whatsoever for the loss. Innocence is not a shield when the bond that the statute required was never put in place. That is the trap, and it closes quietly.

We cannot overstate how important it is to have an ERISA bond in force wherever one is required. If you are reading this and you are not certain your plan is properly bonded, treat that uncertainty as a red flag and resolve it today.

The Bond Protects the Plan. What Protects You?

Now for the distinction that too many fiduciaries miss until it is too late.

An ERISA fidelity bond protects the plan and its participants against theft and dishonesty. It does not protect you, the individual fiduciary, against a claim that you breached your duty of prudence, loyalty, or care. Those are two entirely different risks, and satisfying one does nothing for the other.

That is exactly what fiduciary liability insurance is built for. When a participant, a beneficiary, or the Department of Labor alleges that a fiduciary mismanaged plan assets, selected imprudent investments, charged excessive fees, or otherwise failed in their duties, fiduciary liability coverage responds to defense costs and damages that can otherwise reach a fiduciary’s personal assets. ERISA imposes personal liability on fiduciaries. Your home, your savings, and your retirement can be on the table. Fiduciary liability insurance is the layer that stands between a breach-of-duty claim and your own bank account.

The smart move is to carry both: the fidelity bond the statute demands, and the fiduciary liability policy that shields the people running the plan. Ask us about pairing the two so there are no gaps.

We Bond the Plans Others Won’t Touch

Surety One, Inc. bonds plans with non-qualifying assets, ESOPs, labor union plans, and multi-employer plans. We write the difficult risks that other markets decline. No one is turned away. If you have been told your plan is too complicated or too small or too unusual to bond, you have been talking to the wrong people.

And to be perfectly clear, the ERISA fidelity bond is mandatory. It has been mandatory for years, and it remains mandatory now. There is no version of compliance that skips it.

Don’t gamble on an audit catching you exposed. Get the bond in place, get yourself covered, and sleep at night. Visit us at www.ERISA-Bonds.com, call anytime at (800) 373-2804, or email Underwriting@SuretyOne.com. Follow our blog for all things ERISA.