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The Employee Retirement Income Security Act of 1974 (ERISA) introduced a new set of rules for fiduciaries as a safeguard for employee retirement plans and plan beneficiaries. Management or key personnel who oversee or have a fiduciary responsibility to the company’s retirement fund or plan are now required to have an ERISA bond. Federal law requires employees who have administrative access to the the fund to have a fiduciary bond, an ERISA bond specifically, which provides a minimum level of protection for the plan and its beneficiaries, the employees. Some companies choose a higher amount of coverage than required by law and funds invested in certain types of assets have special coverage requirements.
Read on to understand if this insurance coverage is right for you.
A Fiduciary Bond, commonly called an ERISA bond, is a specialized type of Fidelity Bond that specifically provides coverage for 401k plans, pension plans, or other employee benefit plans sponsored by the business. Larger businesses have teams who are well-versed in the legal requirements surrounding fiduciary bonds, but smaller and mid-sized businesses who offer benefits may find the requirements and similar-sounding terms to be confusing. The key is to understand the limitations of each type of insurance. Fiduciary bonds are limited in scope, with ERISA bonds providing coverage for the plan and its beneficiaries in the event of fraud, impropriety, or dishonesty on the part of the fiduciary or administrator covered by the bond. Proof of loss does not require a conviction to trigger a payable claim.
Getting into details...
An investment error made by trustees of the account. Example: Choosing an investment that was not in line with the needs of the employees.
Mistakes made by administrative personnel. Example: Failing to file an employee's paperwork.
Investments made to benefit the company instead of the investor. Example: Excessive funds invested in companies owned by the advisor's firm.
Not funding investor accounts. Example: Pocketing money instead of placing funds into agreed-upon investments
Any administrator or trustee of an employee benefits or pension plan is legally required to hold this type of insurance. This is coverage that protects the employees or clients of a particular investment or benefit plan, however, not the administration.
Individuals and companies who need Fiduciary Bond Insurance typically include:
According to Department of Labor rules, every person who handles funds or other property of a benefit plan for employees must be bonded — unless that person falls under an exemption for ERISA. Handling employee benefit funds without bonding is illegal. Funds, as defined by ERISA rules, aren’t just money, but also other plan assets, including land and buildings, publicly traded securities, privately held securities, exchange traded fund and mutual fund holdings, or any other plan asset. The goal of ERISA rules and fiduciary bond requirements is to protect the plan — and by extension its vested beneficiaries — against misappropriation or embezzlement, with protection beginning from the first penny.
ERISA bonds are available as 1st-party bonds, which the employer-sponsored plan acquires for itself, or as 3rd-party bonds, which are often purchased for service providers, such as plan advisors.
Fiduciary Bond Insurance or ERISA bonds are required by law. The amount of the bonding, therefore, is also set by federal law. According to ERISA, “A plan official must be bonded for at least 10 percent of the amount of funds he or she handles, subject to a minimum bond amount of $1,000 per plan with respect to which the plan official has handling functions.”
This typically means that individuals have a required bond amount of $500,000 per plan. Starting in 2008, however, federal law changed so that plan officials (typically the company administering the plan) now need to carry a minimum of $1,000,000 in coverage. Of course, individuals and businesses may choose to carry additional coverage if they wish.
A plan with more than 5% of its holdings in certain types of investments, such as real estate or limited partnerships, are required to carry a bond that covers 100% of the plan assets.
Unlike many other types of insurance, an ERISA bond is not subject to a deductible, with the goal of providing protection for the plan from the first penny of loss.
Fiduciary Bond Insurance provides funds to cover the result of mismanagement in the administration and/or investment of employee benefits and pensions. The funds in these bonds only go to the people who have money invested in a plan. They do not pay the legal or liability expenses of the fiduciary and have a specialized scope of coverage.
In the event that a policyholder is sued, Fiduciary Liability insurance will either pay for legal counsel or provide legal counsel. In the former, a policyholder would be on their own to find legal representation. The insurer would provide a set amount of money towards the lawyer’s fees or pay him or her directly. In the latter case, the insurance company would provide legal counsel to the policyholder; typically with a lawyer who is an employee of the insurance company. These lawyers often have a lot of experience with these types of cases, and are very motivated to keep awards and settlement amounts as low as possible.
In the event that a case is lost or a settlement is reached, Fiduciary Bond Insurance will pay a set amount towards the award amount. This amount is based on the term limits of the policy.
ERISA bond insurance typically is priced based on the amount of assets controlled by a plan and the perceived risk by the insurance company. Typically, these bonds cost $200-$1,000 a year for policyholders.
A Fiduciary bond is not the same as a Fidelity bond. It will not cover dishonest acts by your employees, you will need to purchase Employee Dishonesty coverage for this exposure.
Fiduciary Liability insurance is similar to a bond, but it is not required by law. Because the risk of dealing with money is extreme, it is a critical coverage to have if you have assumed any kind of fiduciary liability. This is the case whether it is for an ERISA plan, or for an elderly individual.
While similar, Fiduciary Liability insurance is not exactly the same as an ERISA bond. Fiduciary Liability can cover more than just the liability associated with managing an ERISA plan, while the bond is only for that exposure. Additionally, an ERISA bond is required by law while a Fiduciary Liability insurance policy is not.
General Liability Insurance covers claims of injury, bodily or physical, and property damage. Often, it is offered in a package with Property Insurance. This insurance is meant to protect your business against accidents that occur on your property and at any other covered locations. Commercial General Liability makes it so your business carries on while it faces claims, such as negligence.
If a worker gets injured on the job and requires medical treatment, you’ll be happy to have a Workers’ Compensation Insurance plan. This plan will also cover lost wages and services that help an employee recover and get back to work.
An insurance plan good for small to medium-sized businesses, BOP packages together elements of General Liability and Commercial Property. Depending on the carrier, a Business Owners’ Policy plan may include elements of Crime Insurance and EPLI.
This type of insurance protects your business’s physical assets. It doesn’t matter if you work from home or lease your work space. The plans vary but are usually categorized by the kind of event that led to the loss. Fires and natural disasters are great examples of this. Plans can be customized based on location and business-type.
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