When managing employee benefit plans, safeguarding against financial loss is crucial. Two essential tools for this protection are ERISA bonds and fiduciary liability insurance. While both provide vital security, they serve different purposes and cover distinct risks. Understanding the key differences between ERISA bonds and fiduciary liability insurance is important for comprehensive plan management.
ERISA Bonds
1. Purpose:
ERISA (Employee Retirement Income Security Act) bonds are specifically designed to protect the employee benefit plan against losses caused by acts of fraud or dishonesty by the plan’s fiduciaries or other individuals who handle plan funds.
2. Requirement:
ERISA bonds are mandated by federal law for all individuals who handle funds or property of an employee benefit plan. The law generally requires the bond amount to be at least 10% of the amount of funds handled, with a minimum bond amount of $1,000 and a maximum amount of $500,000 per plan (or $1,000,000 if the plan holds employer securities).
3. Coverage:
Coverage is limited to losses from fraud or dishonesty, such as theft, embezzlement, or forgery. It does not cover losses from fiduciary breaches that are not fraudulent or dishonest.
4. Beneficiary:
The employee benefit plan itself is the beneficiary of the ERISA bond. If a covered loss occurs, the bond pays the plan, not the individual fiduciaries or the plan sponsor.
Fiduciary Liability Insurance
1. Purpose:
Fiduciary liability insurance protects fiduciaries (such as plan trustees, administrators, and other employees) against claims of breaches of fiduciary duty. These breaches can include errors in plan administration, incorrect advice, or other mismanagement issues that could lead to a financial loss for the plan or its participants.
2. Requirement:
Fiduciary liability insurance is not required by law but is highly recommended as it provides broader protection for fiduciaries against various claims, including those not covered by ERISA bonds.
3. Coverage:
Coverage includes claims for breaches of fiduciary duty, errors and omissions in plan administration, imprudent investment decisions, and other actions or inactions that could be deemed negligent. This type of insurance also covers legal defense costs.
4. Beneficiary:
Fiduciary liability insurance protects the fiduciaries themselves, covering their legal costs and liabilities that arise from claims of fiduciary breaches. It can also cover the plan sponsor in some cases.
Key Differences
Coverage Scope: ERISA bonds cover only fraud or dishonesty, while fiduciary liability insurance covers a broader range of fiduciary breaches, including negligence and errors in plan administration.
Legal Requirement: ERISA bonds are required by federal law for those handling plan funds, whereas fiduciary liability insurance is not legally required but provides important additional protection.
Beneficiaries: ERISA bonds benefit the employee benefit plan by compensating it for losses due to dishonest acts. Fiduciary liability insurance benefits the fiduciaries and plan sponsor by covering their liabilities and legal defense costs in claims of fiduciary breaches.
In summary, both ERISA bonds and fiduciary liability insurance are crucial for protecting employee benefit plans and those who manage them, but they serve different purposes and offer different types of coverage. Having both can provide comprehensive protection against a wide range of risks associated with managing employee benefit plans.
