Understanding the Difference Between ERISA Bonds and Fiduciary Bonds
As a plan sponsor, it's crucial to understand the different types of bonds that protect your retirement plan and its participants. Two common types of bonds are ERISA Bonds and Fiduciary Bonds. While they may seem similar, they serve different purposes and offer distinct protections.
ERISA Bonds
ERISA Bonds are required by law under the Employee Retirement Income Security Act (ERISA). These bonds are designed to protect the retirement plan against losses caused by acts of fraud or dishonesty by individuals who handle plan funds. The bond must cover at least 10% of the plan's assets, with a minimum of $1,000 and a maximum of $500,000 (or $1,000,000 for plans that hold employer securities).
Key Points:
Mandatory Coverage: ERISA Bonds are legally required for anyone who handles plan funds.
Protection Scope: They protect against theft, fraud, and dishonesty.
Coverage Amount: Must cover 10% of plan assets, with specific minimum and maximum limits.
Fiduciary Bonds
Fiduciary Bonds, on the other hand, are not legally required but are highly recommended. These bonds provide coverage for fiduciaries—individuals who have discretionary control over the management of the plan or its assets. Fiduciary Bonds protect against losses resulting from breaches of fiduciary duty, such as poor investment decisions or failure to follow plan documents.
Key Points:
Optional Coverage: Fiduciary Bonds are not required by law but are advisable for added protection.
Protection Scope: They cover breaches of fiduciary duty, including poor investment decisions and failure to follow plan documents.
Additional Benefits: They offer broader protection than ERISA Bonds, covering a wider range of potential issues.
Why Both Bonds Are Important
While ERISA Bonds are mandatory and provide essential protection against fraud and dishonesty, Fiduciary Bonds offer an additional layer of security. They protect against a broader range of risks, including breaches of fiduciary duty, which can have significant financial implications for the plan and its participants.
As a plan sponsor, it's important to ensure that both types of bonds are in place to safeguard the retirement plan and its assets. By doing so, you can mitigate risks and provide peace of mind to plan participants.
For more information or assistance with obtaining these bonds, please contact your Trusted KerberRose Advisor.
Tony Powers, AIF®, CFP®, CRPS® Shareholder
Tony Powers, President of KerberRose Wealth Management, has more than 20 years of experience in the financial services industry. He specializes in helping private and public sector employers set-up and manage their employee retirement plans. Tony provides Fiduciary Services and Support, Plan Design Consultation, Plan Benchmarking and Financial Wellness.