Which Bond is Best?

Retirement plans can be covered by three types of bonds: fidelity bonds, fiduciary bonds and cyber bonds. As a plan sponsor, you will be asked for the fidelity bond coverage amount during the year-end data collection process because the amount is reported on the plan’s Form 5500 each year. Although only the fidelity bond is required for most plans, the fiduciary and cyber bonds offer additional protection for the plan—and therefore, the participants. Let’s review each option to help ensure you have the coverage you need.

As mentioned, the fidelity bond is required for most plans due to the Employee Retirement Income Security Act (ERISA). The fidelity bond, or ERISA bond, must cover at least 10% of the beginning-of-year plan assets. There is a $1,000 minimum bond amount and a $500,000 maximum. If the plan holds employer stock or securities, the maximum required value increases to $1,000,000. Some assets may also require additional coverage. When the asset balance is $0 during the first year of the plan, the bond is still required and should be purchased based on the estimated asset balance for that year. Some policies offer an inflation clause or an automatic escalation to increase in value as the plan’s assets increase, which can help simplify maintaining the required coverage amount.

While the fidelity bond protects the plan’s participants from losses due to fraud or theft, the fiduciary bond protects against losses caused by breaches of fiduciary responsibility. A fiduciary is anyone who exercises discretionary control or authority over a plan’s management, administration or assets. Even a trusted fiduciary that acts in good faith may inadvertently violate the laws outlined under ERISA. The fiduciary bond is not required but may be desirable to protect both your company and the fiduciary in these situations.

The cyber bond is also available to protect the plan from financial losses caused by cyberattacks or data breaches. Cybersecurity is a major concern for all institutions, and retirement plans are no different. For those who are apprehensive about the threat of cyberattacks, the cyber bond can be a valuable option.

To ensure peace of mind for you and your participants, the cyber bond and fiduciary bond can be worthwhile companions to the required fidelity bond. If you have questions about what is necessary for your plan, we can talk about the available options to find the best fit.