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10 September

Understanding the Differences Between ERISA Bonds and Fiduciary Bonds

September 10, 2024 By Nick Stucko Education  

We have found at Spectrum that plan sponsors and the advisors who work with them may sometimes be confused about the differences between ERISA Bonds and Fiduciary Bonds. With this in mind, here is a quick overview of the distinctions and why understanding them is key for effective retirement plan risk management.  

 

  • What Are Fiduciary Bonds?

What has become more imperative and typically discussed in trustee meetings are fiduciary bonds. It is important to note that investment committees comprising members and employees from all parts of a company, and not necessarily with investment or retirement plan expertise, are considered fiduciaries. While they may consider membership on the investment committee an honor, they also need to realize the potential risks.

 

  • What Are ERISA Bonds?

ERISA bonds are required by law and need to represent 10% of the value of the retirement plan assets. If the appropriate retirement plan coverage is not provided to a plan through an ERISA bond, it can lead to an IRS or DOL audit.

 

  • ERISA bonds, also called “dishonesty bonds,” only protect a retirement plan if it is subject to theft. If plan assets are stolen, the ERISA bond will replenish those assets, and the issuing bond company will pursue the asset absconder.
     
  • Also, an ERISA bond’s limitations are typically fairly restrictive. It is always important to review the bond’s provisions carefully to understand what the bond does or does not cover.

 

 

  • For example, if they make bad investment decisions or do not follow plan document rules, investment committee members may be sued personally. Absent a fiduciary bond, they have no coverage.
     
  • An ERISA bond only covers theft, but not if someone with oversight over the retirement plan, such as investment committee members, make a bad decision. In that situation, a fiduciary bond would mitigate risk.

 

  • With cybersecurity issues and cyber theft a significant challenge in today’s more digitalized world, it is essential to understand and read carefully the provisions of a fiduciary bond, as many may not cover cyber security issues. Plan sponsors must review the bond’s provisions carefully and work with a company that provides that coverage.

 

 

 

ERISA & Fiduciary Bond Considerations

The problem arises when a plan sponsor believes they are covered for all situations because they have met the legal requirement of having an ERISA bond for their retirement plan, but they are not. Plan sponsors also need to consider how to protect those engaged with the investment decision-making and fiduciary oversight of the retirement plan on an ongoing basis.

 

Importantly, a plan sponsor cannot deflect the liability by hiring an independent advisory firm, as the plan sponsor still retains responsibility for ensuring decisions are made in the best interest of the plan participants. If a lawsuit occurs, an investment advisor hired may be sued, but typically so will the plan sponsor and investment committee.

 

For all these reasons, a fiduciary bond should be considered as an important risk management component for retirement plan sponsors. As always, your local Spectrum representative is available to help you with any questions you may have.

 

 

 

 

 

 

 

 

 

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