Haris Ashley
When it comes to insurance, fiduciary and fidelity refer to different types of coverage. Fiduciary liability insurance protects the company and its fiduciaries from legal liability and breach of fiduciary duties, while a fidelity bond (or surety bond) protects the plan and its participants from losses due to fraud or dishonesty. While the former is optional, the latter is mandatory for all employee benefit plans and individuals that handle them.
| Characteristics | Fidelity Bond |
|---|---|
| Mandatory | Yes |
| Coverage | Protects the plan and its participants from losses resulting from fraud or dishonesty |
| Insured | The plan is the insured |
| Cost | Paid from plan assets |
| Characteristics | Fiduciary Liability Insurance |
| --- | --- |
| Mandatory | No |
| Coverage | Protects the plan's fiduciaries from claims of a breach of fiduciary duties |
| Insured | The fiduciary is personally insured |
| Cost | Paid by the employer or the fiduciary |
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What You'll Learn
Fidelity bonds protect against fraud
Fidelity bonds, also known as honesty bonds, are a form of business insurance that protects employers against financial losses from employee fraud or dishonesty. They are a critical aspect of an employee benefits plan. This type of bond does not protect employers from employee theft but instead protects the customers and clients of the business.
Fidelity bonds are especially important for small businesses, which can be financially devastated by the actions of a single dishonest employee. They are also mandatory for all individuals that handle an employee benefits plan, including 401(k) plans. However, there are exemptions for church plans, government plans, or completely unfunded plans.
Fidelity bonds are typically very inexpensive because instances of fraudulent misappropriation of plan assets are rare. They are also considered a component of a company's risk management strategy. If a company has employees who commit fraudulent acts, the company itself may be exposed to legal or financial penalties.
Fiduciary liability insurance, on the other hand, covers the actual plan fiduciaries and protects them in the event of a claim. This type of insurance is optional and generally much more expensive than fidelity bonds. It does not cover losses from theft of plan assets, and there doesn't have to be an actual loss for fiduciary liability insurance to take effect.
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Fiduciary liability insurance protects against breach of duty
While fidelity bonds and fiduciary liability insurance are both critical aspects of an employee benefits plan, they serve different purposes. Fidelity bonds, also known as surety bonds, are a type of insurance that protects the plan itself against losses due to fraud or dishonesty. On the other hand, fiduciary liability insurance protects the company and its employees from legal claims and financial losses arising from mismanagement of the benefit plan or breach of fiduciary duty. This includes covering legal fees, penalties, and judgments.
Fiduciary liability insurance is designed to safeguard trustees, plan sponsors, and other fiduciaries from personal liability in the event of a breach of their fiduciary duties. It provides two key benefits: defence and indemnity. The insurance covers the cost of legal defence for fiduciaries accused of violating their duties and also indemnifies trustees for their alleged violations and negligent administrative acts or omissions. This means that if a settlement or judgment of liability is reached, the policy will cover any damages owed to the complaining party.
The scope of fiduciary liability insurance has broadened over the years as claims activity has increased. For example, Wells Fargo faced a lawsuit alleging that it funnelled employee retirement savings into underperforming mutual funds for its own enrichment, resulting in a breach of fiduciary duties. In another case, a group of workers sued Trinity Health hospital for pension mismanagement, claiming that the hospital improperly classified its pension plans, leading to underfunding. These types of claims can be very costly, and fiduciary liability insurance helps protect businesses from the financial burden of such lawsuits.
While fiduciary liability insurance is not required by law, it is an important consideration for any company offering employee benefit plans. The decision to purchase this insurance depends on each company's risk tolerance, the cost of the insurance, and the specific circumstances related to the plan. By having fiduciary liability insurance in place, companies can protect themselves and their employees from the high costs and potential losses associated with breach of fiduciary duty claims.
In summary, fiduciary liability insurance provides essential protection for companies and individuals in the event of allegations or lawsuits arising from breaches of fiduciary duties. It offers comprehensive coverage for legal fees, settlements, and judgments, ensuring that businesses and their employees are safeguarded from financial losses and personal liability.
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Fiduciary insurance is optional
While a fidelity bond is mandatory, fiduciary liability insurance is optional. This means that, while a company may choose to take out fiduciary insurance, it is not required by law.
Fidelity bonds and fiduciary liability insurance are not the same. Both serve to mitigate risk for fiduciaries and are critical aspects of an employee benefits plan, but the difference lies in the risks that they cover. Fidelity bonds are a form of insurance that protects the plan and its participants from losses resulting from fraud or dishonesty. All Employee Retirement Income Security Act (ERISA) plans are required to have a fidelity bond. This is because ERISA requires that anyone who "handles funds or other property" of an ERISA plan be bonded. The plan is the insured party in the case of a fidelity bond, and the bond must extend coverage to individuals responsible for handling plan funds or property.
Fiduciary liability insurance, on the other hand, protects the company from legal liability that arises from the sponsorship of a plan. It covers the actual plan fiduciaries and protects them in the event of a claim that they breached their fiduciary duties. Policies will vary from one insurer to the next, but examples of the types of benefits afforded include legal fees as well as covering any penalties or judgments. As a general rule, there doesn’t have to be an actual loss in order for fiduciary liability insurance to kick in. If one of the benefits is coverage of legal fees, even an accusation of fiduciary mismanagement can trigger benefits.
While it is not required by ERISA, many fiduciaries seek to have this coverage for their own protection. Without fiduciary liability insurance, a fiduciary could be personally liable for losses resulting from their fiduciary failures. These claims are almost always very costly. Not only are the costs of going to court and defending oneself high, but the chances of losing or having to settle are also incredibly high.
In conclusion, while a fidelity bond is mandatory, fiduciary liability insurance is optional. This means that companies can choose whether or not to take out fiduciary liability insurance based on their own risk assessment and the costs involved.
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Fidelity bond coverage is mandatory
While fiduciary liability insurance is optional, fidelity bond coverage is mandatory. This is because it is required by the Employee Retirement Income Security Act (ERISA). ERISA mandates that all fiduciaries of employee benefits plans and every person who comes into contact with plan assets be bonded.
Fidelity bonds, also known as surety bonds, are a special type of insurance that protects a company-sponsored retirement plan from losses due to misuse or misappropriation of plan assets by a plan official. In other words, they protect the plan itself against fraud or dishonesty. All qualified retirement plans (except certain owner-only plans, governmental plans, and church plans) are required to maintain fidelity bonds and to report the coverage amounts on their Forms 5500 each year.
The required coverage amount is generally 10% of the total plan assets as of the first day of the plan year, subject to a minimum bond amount of $1,000 and a maximum of $500,000. However, for plans that invest in the stock or other securities of the sponsoring company, the maximum bond amount is increased to $1 million.
Fidelity bond coverage is typically very inexpensive because instances of fraudulent misappropriation of plan assets are rare. In contrast, fiduciary liability insurance is usually much more expensive because it covers the plan fiduciaries themselves and protects them in the event of a claim that they breached their fiduciary duties. This includes covering legal fees, penalties, and judgments.
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ERISA requires a fidelity bond for all individuals handling employee benefits
The Employee Retirement Income Security Act of 1974 (ERISA) requires a fidelity bond for all individuals handling employee benefits. This includes 401(k) plans and other qualified retirement plans, with certain exemptions for church plans, government plans, and unfunded plans. The purpose of the bond is to protect plan participants against losses caused by fraud, theft, embezzlement, or other dishonest acts.
ERISA defines "handling" as having actual physical contact with the funds, the power to have contact with or control funds, transfer funds, or negotiate the value of the property. The law specifically requires that this fidelity bond insures a plan against losses due to fraud or dishonesty by those who handle plan funds or property. This includes administrators, trustees, and anyone serving in a fiduciary capacity.
The minimum coverage required by ERISA is 10% of the plan assets handled, with a minimum of $1,000 and a maximum of $500,000 in bonding per plan. For plans holding employer securities, the maximum required bond is $1,000,000. These bonds can be purchased from a surety or reinsurer named on the Department of the Treasury's Listing of Approved Sureties.
Fidelity bonds are distinct from fiduciary liability insurance, which is optional. While fidelity bonds protect the plan itself from losses due to fraud or dishonesty, fiduciary liability insurance covers the plan fiduciaries in the event they are accused of or found to have breached their fiduciary duties. This type of insurance typically covers legal fees and other penalties or judgments and can be triggered by an accusation, even without an actual loss.
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Frequently asked questions
A fidelity bond (or surety bond) protects a plan and its participants from losses due to fraud or dishonesty. It is a mandatory form of insurance and is required by the Employee Retirement Income Security Act (ERISA).
Fiduciary liability insurance is optional and protects the company and its fiduciaries from legal liability arising from claims of a breach of fiduciary duty.
The plan is the insured party in a fidelity bond. It must cover any persons who handle funds or property of the plan.
Fiduciary liability insurance protects the plan's fiduciaries.
A fidelity bond protects against fraud and dishonesty, whereas fiduciary liability insurance protects the fiduciary from legal liability arising from claims of a breach of fiduciary duty.
