FKINP The Short Answer: One Is Required, One Is Optional
An ERISA fidelity bond is legally required for people who handle plan money.[1] Fiduciary liability insurance is optional coverage for the fiduciaries’ own legal exposure.[7] Neither one replaces the other. ERISA §412 (29 U.S.C. §1112) says every fiduciary of an employee benefit plan and every person who handles funds or other property of the plan must be bonded, and that the bond protects the plan against loss from fraud or dishonesty by those plan officials.[1] ERISA’s insurance provision, §410 (29 U.S.C. §1110), is permissive. It says nothing in that part precludes a plan, a fiduciary or an employer from buying insurance for fiduciary liability, and it does not require anyone to buy it.[7]
- ERISA fidelity bond: protects the plan itself. It responds to theft-type losses caused by a bonded person and is mandatory unless a statutory exemption applies.[1][3]
- Fiduciary liability insurance: protects fiduciaries, and usually the sponsoring company, against claims that they mismanaged a plan or its assets. It is bought voluntarily and its scope depends on the policy.[7][8]
The practical result: a sponsor with only a bond leaves committee members and officers exposed to personal liability for fiduciary breaches, and a sponsor with only fiduciary insurance may still be out of compliance with the bonding rule.[1][6]
What the ERISA Bond Requirement Says
Who must be bonded
Section 412(a) reaches every plan fiduciary and every person who “handles funds or other property” of the plan.[1] The Department of Labor’s bonding regulation reads handling broadly: it applies whenever a person’s duties create a risk that plan funds could be lost through fraud or dishonesty. Physical contact with cash or checks, power to withdraw money from a plan account, authority to sign or endorse checks, power to transfer plan property to oneself or a third party, and disbursement authority all generally count.[2] Clerical duties performed under close supervision and fiscal controls, where the risk of loss is negligible, may not.[2]
Statutory exemptions
- Plans that pay benefits only from the general assets of an employer or union; the administrator, officers and employees of those plans are exempt.[1]
- Registered broker-dealers that are subject to a self-regulatory organization’s fidelity bond requirements.[1]
- Certain supervised corporations with trust powers or an insurance business that meet capital and surplus minimums set by regulation.[1]
The Secretary of Labor may also exempt a plan when other bonding arrangements or the plan’s overall financial condition adequately protect participants and beneficiaries.[1]
How much bond coverage is required
- The amount is fixed at the beginning of each plan fiscal year.[1]
- It must be at least 10% of the funds handled, measured by what the covered person or group handled in the preceding reporting year, or estimated for a plan without a prior year.[1][4]
- The statute sets a minimum of $1,000 and a general maximum of $500,000.[1]
- For a plan that holds employer securities, or for a pooled employer plan, $1,000,000 replaces $500,000.[1]
- The DOL regulation requires the bond to cover from the first dollar of loss up to the required amount, so a deductible inside that amount is not allowed.[4]
What the bond actually covers
The statute says the bond protects the plan against loss from acts of fraud or dishonesty by the plan official, directly or through connivance with others.[1] The DOL regulation gives larceny, theft, embezzlement, forgery, misappropriation, wrongful abstraction, wrongful conversion and willful misapplication as examples, and says the bond must pay even if the person gained nothing personally.[3] The surety must be a corporate surety acceptable on federal bonds under Treasury authority, and the bond must be in a form approved by the Secretary of Labor.[1]
Two compliance rules sponsors overlook
- It is unlawful for an unbonded plan official to handle plan funds, and unlawful for anyone with authority over those functions to let that happen.[1]
- A required bond may not be bought from a surety, agent or broker in which the plan or a party in interest has control or a significant financial interest.[1]
What Fiduciary Liability Insurance Covers
The exposure starts with the duties themselves. Under ERISA §404, fiduciaries must act solely in the interest of participants and beneficiaries, for the exclusive purpose of providing benefits and paying reasonable plan expenses, with the care of a prudent person familiar with such matters, by diversifying investments unless it is clearly prudent not to, and in line with plan documents.[5] A fiduciary who breaches those duties is personally liable to make good the plan’s resulting losses and to restore profits made through use of plan assets, and a court may order other relief, including removal.[6]
A fidelity bond does not answer that liability, because a fiduciary can breach the prudence standard without any fraud or dishonesty.[1][5] Fiduciary liability insurance is the product built for it. Chubb describes it as protecting companies, executives and employees against claims that they mismanaged employee benefit plans, including retirement and group health plans, or plan assets.[8]
How ERISA shapes these policies
- A plan provision that tries to relieve a fiduciary of responsibility or liability under ERISA’s fiduciary rules is void as against public policy, apart from narrow statutory exceptions.[7]
- A plan may buy insurance for its fiduciaries or itself only if the policy permits the insurer recourse against a fiduciary who breached a fiduciary obligation.[7]
- A fiduciary may buy coverage for his or her own account, and an employer or union may buy coverage for the people who serve as plan fiduciaries; the text of those two provisions contains no recourse condition.[7]
Who pays the premium is therefore a design decision, not a formality. Have ERISA counsel confirm the structure before plan assets are used.
Coverage that is often confused with it
Chubb states that employee benefits liability (EBL) coverage provides some protection for plan administration errors but does not cover breach of fiduciary duty claims.[8] Chubb also notes that hiring a third-party administrator or investment adviser does not remove the duty to select and monitor them, and that a person can be a “functional” fiduciary based on conduct even if no document names them.[8]
ERISA Bond vs Fiduciary Insurance, Point by Point
Who is protected
- Bond: the plan.[1]
- Fiduciary insurance: the fiduciaries and, typically, the sponsoring company.[8]
What triggers payment
- Bond: loss caused by fraud or dishonesty of a bonded person.[1][3]
- Fiduciary insurance: claims alleging breach of fiduciary duty or plan mismanagement, as the policy defines a claim.[8][9]
Legal status
- Bond: mandatory for covered plan officials, subject to statutory exemptions.[1]
- Fiduciary insurance: permitted by ERISA §410, not mandated.[7]
Amount
- Bond: at least 10% of funds handled, $1,000 minimum, $500,000 general maximum or $1,000,000 for plans holding employer securities and pooled employer plans, with no deductible inside the required amount.[1][4]
- Fiduciary insurance: limits, retentions and sublimits are chosen at purchase; carrier descriptions refer to retentions and sublimited coverages.[9][10]
Who may buy it
- Bond: obtained for the plan officials who handle funds, from an acceptable corporate surety without conflicts of interest.[1]
- Fiduciary insurance: the plan (with insurer recourse), a fiduciary for his or her own account, or the employer or union.[7]
Carrier Examples: Terms Worth Comparing
These examples come from carriers’ current public product pages. They illustrate what to compare; they are not quotes, and the issued policy controls.
Chubb Primary fiduciary liability, as Chubb describes it
- Coverage for written demands for monetary damages, civil and criminal complaints and formal investigations involving ERISA fiduciary breaches and plan administration errors.[9]
- Coverage for ERISA §502(i) and §502(l) fines, which Chubb calls unlimited, plus an additional penalty sublimit that sits above other fine and penalty sublimits.[9]
- First-party coverage when a company enters a governmental voluntary correction program.[9]
- Notice up to 180 days after expiration of a policy that has been renewed, and an option for the insured to take over defense of a new claim.[9]
Chubb positions this product for publicly traded companies and financial institutions, its ForeFront Portfolio for private and not-for-profit entities, and a separate policy for multiemployer and public sector plans.[8]
AIG Fiduciary Liability Insurance Edge, as AIG describes it
- Sublimited coverage for certain fines, penalties and related costs under the Affordable Care Act, ERISA §502(c), HIPAA, the HITECH Act, IRS Section 4975 and the Pension Protection Act.[10]
- Costs of assessing and correcting non-compliance under certain voluntary compliance programs.[10]
- Available settlor coverage for covered wrongful acts in forming and designing a plan.[10]
AIG says coverage depends on the facts of each case and on each policy’s terms, conditions and exclusions, and it suggests requesting the standard policy form.[10] Neither carrier page publishes premiums or standard limits, so those figures must come from a quote.
Questions to Ask Before You Buy or Renew
For the ERISA bond
- Is the plan the named insured, and are all people who handle funds under the DOL criteria covered?[1][2]
- Is the amount at least 10% of last year’s funds handled, and does the plan hold employer securities that raise the cap to $1,000,000?[1]
- Does any deductible apply inside the required bond amount?[4]
- Is the surety acceptable on federal bonds under Treasury authority?[1]
- Does the broker or surety have ties to the plan or a party in interest?[1]
- Who will reset the amount at the start of each plan year as assets change?[1]
For fiduciary liability insurance
- Who is insured: the company, each plan, directors, officers, employees, committee members and functional fiduciaries?[8]
- Which plans are covered, including health and welfare plans as well as retirement plans?[8]
- Who pays the premium, and if plan assets pay, where is the insurer recourse provision?[7]
- How does the policy define a claim: written demands, investigations, regulatory proceedings?[9]
- Which fines and penalties are covered, and what are the sublimits?[9][10]
- Are voluntary correction program costs and settlor acts covered?[9][10]
- What is the retention, who controls defense, and can you settle within the retention without consent?[9]
- What is the post-expiration reporting window, and how do you give notice of potential claims?[9]
- Do you also need separate EBL coverage for administrative errors?[8]
Ask for the full specimen policy and endorsements, not only a product summary, and compare them against your plan documents.[10]
Frequently Asked Questions
- Is fiduciary liability insurance required by ERISA?
- No. ERISA §412 requires a fidelity bond for fiduciaries and others who handle plan funds.[1] ERISA §410 allows a plan, a fiduciary or an employer to buy fiduciary liability insurance but does not require it.[1][7]
- Does an ERISA bond protect plan fiduciaries if they are sued?
- No. The bond protects the plan against loss from fraud or dishonesty by bonded plan officials.[1] Claims that a fiduciary breached the prudence or loyalty duties are a separate exposure, and fiduciaries can be personally liable for resulting plan losses.[1][6]
- How much ERISA bond coverage does a plan need?
- At least 10% of the funds handled, with a $1,000 minimum and a general $500,000 maximum.[1] The maximum is $1,000,000 for plans that hold employer securities and for pooled employer plans.[1] The amount is fixed at the start of each plan year.[1]
- Can an ERISA bond have a deductible?
- Not within the required bond amount. The DOL regulation requires coverage from the first dollar of loss up to the required amount.[4]
- Can plan assets pay for fiduciary liability insurance?
- ERISA allows a plan to buy fiduciary insurance only if the policy permits the insurer recourse against a fiduciary who breached a fiduciary obligation.[7] Employers and fiduciaries may also buy coverage directly.[7] Confirm the arrangement with ERISA counsel.
- Does employee benefits liability coverage replace fiduciary liability insurance?
- Chubb says no: EBL provides some coverage for plan administration errors but does not cover breach of fiduciary duty claims.[8]
References
- 29 U.S. Code § 1112 – Bonding (ERISA §412) (cornell.edu)
- 29 CFR § 2580.412-6 – Determining when funds or other property are handled (cornell.edu)
- 29 CFR § 2580.412-9 – Meaning of fraud or dishonesty (cornell.edu)
- 29 CFR § 2580.412-11 – Amount of the bond (cornell.edu)
- 29 U.S. Code § 1104 – Fiduciary duties (ERISA §404) (cornell.edu)
- 29 U.S. Code § 1109 – Liability for breach of fiduciary duty (ERISA §409) (cornell.edu)
- 29 U.S. Code § 1110 – Exculpatory provisions; insurance (ERISA §410) (cornell.edu)
- Fiduciary Liability Insurance | Chubb (chubb.com)
- The Chubb Primary Fiduciary Liability Insurance | Chubb (chubb.com)
- Fiduciary Liability Insurance | AIG (aig.com)
