What Is a Fidelity Bond for a 401(k) Plan?

A fidelity bond for a 401(k) plan safeguards assets within an employee’s retirement account. This bond provides protection against potential losses from dishonest acts by individuals managing plan funds. It ensures participants’ retirement savings are secure, even if those entrusted with assets engage in fraudulent activities. The bond acts as insurance, offering financial recovery for the plan.

Understanding Fidelity Bonds for 401(k) Plans

A fidelity bond is a type of insurance that protects the plan from financial losses. These losses arise from fraud or dishonesty by individuals with access to plan assets. The bond covers acts like embezzlement, theft, forgery, and other dishonest or fraudulent acts.

The requirement for these bonds is established by the Employee Retirement Income Security Act of 1974 (ERISA), a federal law. ERISA mandates that individuals who handle plan funds must be bonded to ensure the security of those assets. This legal framework addresses the risk of financial malfeasance.

A fidelity bond differs from fiduciary liability insurance, which protects fiduciaries from breaches of duty like imprudent investment decisions. A fidelity bond protects the plan from direct financial harm caused by intentional dishonest acts. It allows the plan to recover stolen or misused funds, safeguarding participants’ retirement savings.

Determining Who Needs Coverage

ERISA requires that “persons handling funds” are covered by a fidelity bond. This term broadly encompasses any individual who performs duties that involve access to, or control over, plan assets. Even non-fiduciaries who handle plan funds are subject to this requirement.

Roles that typically necessitate bonding include plan administrators, trustees, and employees who have signatory authority over plan bank accounts. Other individuals with direct physical contact with cash, checks, or other plan assets, or those who can transfer funds, also fall under this requirement. The intent is to bond anyone whose actions could lead to a loss of plan assets due to their dishonesty.

Most private-sector 401(k) plans are subject to these bonding rules. However, certain types of plans are exempt from the bonding requirements. These exemptions commonly include governmental plans, church plans, and unfunded plans.

Calculating the Required Bond Amount

The minimum required fidelity bond amount is that it must be at least 10% of the amount of funds handled by the plan. This calculation is typically based on the total plan assets at the beginning of the plan year. For instance, if a plan holds $1,000,000 in assets at the start of its fiscal year, the minimum bond required would be $100,000.

Specific minimum and maximum bond amounts are established by regulation. For plans with less than $10,000 in assets, the minimum bond required is $1,000. The maximum bond amount is generally $500,000, regardless of how large the plan’s assets become. For example, a plan with $6,000,000 in assets would still only need a $500,000 bond, as 10% of its assets ($600,000) exceeds the maximum.

An exception applies to plans holding employer securities, where the maximum bond can extend up to $1,000,000. Plan administrators must annually review the bond amount to ensure compliance. If plan assets increase significantly, the bond must be adjusted to meet the new requirement.

Securing and Managing Your Fidelity Bond

Fidelity bonds are obtained from surety companies or insurance companies authorized to issue such bonds. When seeking a bond, it is essential to confirm that the surety company is approved by the U.S. Department of the Treasury. Selecting an unapproved provider could result in the bond being deemed non-compliant with ERISA regulations.

The application process for a fidelity bond requires specific information about the plan and the individuals to be bonded. This includes:
The plan’s legal name and Employer Identification Number (EIN)
Total plan assets and number of plan participants
Names, roles, and responsibilities of individuals handling funds

Fidelity bonds are typically issued for a specific term, often one year, and require renewal to maintain continuous coverage. Plan administrators must review the bond amount, usually at the start of each plan year, to ensure it continues to meet the 10% rule based on current plan assets. If plan assets have grown substantially, an increase in the bond amount may be necessary to remain compliant. Maintaining records of the bond, including its effective dates, coverage amount, and renewal notices, is a prudent practice for demonstrating compliance.