401(k) plan coverage – What’s required?

While maintaining an ERISA bond should be an annual housekeeping matter for plan sponsors, confusion exists in regards to what the bonding requirements are and whether or not that’s all plan sponsors should obtain. ERISA generally requires every fiduciary, and anyone who handles the funds or property of the retirement plan, be bonded, unless an exception under ERISA §412 applies.

The purpose of the bond is to protect the plan from loss due to fraud or dishonesty on the part of those who handle the plan, and the amount of the bond is no less than 10% of the plan’s assets as of the beginning of the plan year. Unless a plan holds company stock, the maximum amount of the bond is $500,000. ERISA bonds can be purchased on a stand-alone basis or as an endorsement on a crime policy.

To examine the bond in action, let’s assume that over time a plan fiduciary successfully embezzles money from a plan that has the maximum bond coverage of $500,000. All other plan fiduciaries are completely unaware of the embezzlement and the issue doesn’t surface until long after the fraudulent fiduciary has resigned and escaped with the stolen money. In this instance, the bond may provide protection to the plan up to the maximum of $500,000.

While this example illustrates the purpose of the ERISA bond, there’s still the issue of the other plan fiduciaries to consider. While they didn’t know of the fraud taking place, one might argue that they contributed to the plan losing money by being ignorant in their fiduciary duty. In this instance, fiduciary liability insurance is a form of insurance coverage that could help protect the plan fiduciaries’ assets and cover the cost of their legal defense.

Therefore, there are two forms of coverage to consider within the context of an employer-sponsored retirement plan:

1. Required ERISA fidelity bond to protect the plan, and
2. Recommended fiduciary liability insurance to help protect the plan fiduciaries

For more information on the ERISA bond requirements for your retirement plan, contact a Marsh McLennan Agency (MMA) advisor.

Securities offered through MMA Securities LLC (MMA Securities), member FINRA / SIPC, and a federally registered investment advisor. Main Office: 1166 Avenue of the Americas, New York, NY 10036. Phone: (212) 345-5000. Variable insurance products distributed by MMA Securities LLC, CA OK 81142. MMA and MMA Securities are affiliates owned by Marsh & McLennan Companies. MMARetirement.com.