Goldilocks and the Three Bonds

Once upon a time, there was a busy company manager named Goldilocks who was lost in the woods of deciding which ERISA bond was right for her company’s qualified retirement plan. She knew that her Worker Bees had to be well protected, but she also knew that it was hard for her to resist a sale!

Enchanted by the idea of a bargain, her curious eyes came to rest upon the Wee Bond. “I’m not sure if it’s the best fit, but it’s so affordable!” she said.

Just as she was about to purchase the Wee Bond, a wee warning tag appeared with wee writing – writing that was so small that she almost missed it in her excitement! The print read, “This Wee Bond has a wee price, but beware – it won’t cover all your Worker Bees!”

“Oh no, this bond’s too low!” Goldilocks exclaimed. “If I purchase the Wee Bond, the hungry bears from the Department of Labor could sniff it out and ruin my day!”

She wisely moved on. The next bond in line was the Burly Bond. This bond was big enough to cover all her Worker Bees, and perhaps several more!

“Wow, that Burly Bond is very big!” Goldilocks exclaimed. She knew that all her Worker Bees would be well-covered by the Burly Bond. She then looked at the price tag. “Dear me!” she exclaimed, her hand fluttering her breast. “The price is so big, just like the bond itself!”

Recovering, she noticed the Medium Bond out of the corner of her eye. This bond was more humble than the Burly Bond, but not quite as petite as the Wee Bond. She examined the size and price of the bond.

“This one seems just right!” she said. “All my Worker Bees will be well-covered, and I won’t be paying too much!”

So she bought the Medium Bond, and she and her Worker Bees lived happily ever after.

My name is Laurie Wieder, and I’m a retirement plan consultant. My passion is helping employers improve their 401(k) and 403(b) plans and scouting for innovative ways to solve their plans’ issues. Figuring out the right amount for an ERISA bond is just one area on which I counsel employers. From my conversations with employers, I find ERISA bonds are not only an area of confusion – many employers have experienced significant problems when they have purchased the wrong bond.

You see, while the Goldilocks of our story was quickly and easily able to find the right bond for her company, the reality is that ERISA bonds don’t always come with warning labels, not even wee-sized ones. Finding the right bond amount can be confusing. Worse, the consequences of choosing the wrong amount can be significant and severe, as it invites an audit and potential fines and penalties from the Department of Labor. (Employers report the value of their plans’ ERISA bonds annually as they file their plan’s IRS Form 5500.)

To help clear up some of the understandable confusion and give you a better idea of potential solutions, here are some of the Department of Labor’s “ground rules” on ERISA bonds:

  1. Every qualified plan needs to have an ERISA bond.
  2. The bond’s required value is based on the value of the plan’s assets at the beginning of the plan year.
  3. The bond must be equal in value to 10% of the plan assets or $500,000 – whichever is less. An exception will be made, however, if the plan offers company stock as an investment option. If such is the case, the maximum bond amount becomes $1,000,000.
  4. You may have the option to purchase an ERISA bond that will automatically adjust to the correct coverage amount. If this is an option that interests you, you should consult with your commercial insurance representative.

In the process of helping many clients over the years, I often have found that ERISA bonds have been the wrong amount. In some cases, they were too high because employers wished to err on the safe side. Sometimes, however, they were way too low – inviting considerable trouble!

Employers have learned the hard way that when the Department of Labor arrives for an audit because a low ERISA bond was reported on their plan’s Form 5500, the DOL audit itself will explore all aspects of the qualified plan and its administration. Given the complexity surrounding the management of a 401(k) or 403(b) plan, it’s almost a “given” that DOL will find numerous areas of noncompliance and assess a variety fines and penalties.

The good news is that company managers who are confused about any element of their plan don’t have to find their way to a solution in the dark. For example, beyond ERISA bonds, I help my clients make improvements to their plan in a wide range of areas. If you have any questions or concerns about your plan, or if you are curious about what improvements could be made but are unsure what to ask, email me or give me a call.

Let’s have a simple chat about your plan. You never know until you ask!

This blog is written to help make the lives of plan sponsors easier in the process of meeting legal requirements under ERISA for their defined contribution plans. Please understand that reading this blog should not alone take the place of a one-on-one consultation regarding the needs of your specific plan, and hence cannot be a guarantee against fiduciary breaches.