Retirement plans need protection from theft, fraud or employee claims of mismanagement. There are two types of protection available: Fidelity Bonds and Fiduciary Insurance. What is the difference and what do you need?
Fidelity Bonds protect the retirement plan against theft or fraud. Plans are required to have a bond that covers at least 10% of plan assets, capped at $500,000. The exception to this requirement is a plan that covers owners only. In addition, if the plan contains assets that are not in custody of a documented trustee, additional coverage is required.
Fidelity bonds are generally inexpensive to purchase because retirement plan theft or fraud is relatively rare. When it does occur, carriers are aggressive in the pursuit of the wrong-doer. Bonds typically cover a 1 to 5 year period and may have an ‘inflation guard’ which means that the coverage will adjust to cover 10% of the plan assets throughout the coverage period. Any insurance agency can sell fidelity bonds and they may be combined with other company insurance policies.
On the other side of retirement plan protection is Fiduciary Insurance. This coverage is not required but is probably more critical to have since it protects individuals responsible for the plan in case of a fiduciary mistake. A fiduciary is anyone who makes discretionary decisions in the plan. An example is someone who allocates funds in the retirement plan or makes eligibility decisions. People within the plan can get very upset about the investment results and claim that the fiduciaries are inept at making decisions. This has become more prevalent in recent years due to poor performance of the stock market. The current focus on retirement plan fee disclosure has heightened awareness of fiduciary responsibilities.
Fiduciary Insurance is generally expensive. It is generally sold by larger agencies and specialty companies. If you maintain Errors and Omissions Insurance, check the provisions carefully; it may or may not provide adequate coverage in the case of negligence on the part of a fiduciary.
Fidelity Bonds and Fidelity Insurance are just an example of why Plan Sponsors need guidance from trusted advisors. While coverage may be costly, the right coverage will provide peace of mind and can avert disaster if the unthinkable occurs.