May 1, 2019—401(k) plan sponsors can benefit from knowing three simple insurance facts. This can help keep sponsors compliant, eliminate potential reporting errors that could trigger a DOL audit, and cover their defense if charged with imprudent plan management. Given that there’s so much for employers with company retirement plans to keep track of, these simple facts often are either unknown or forgotten . . . with plan sponsor fiduciaries exposed to potential liability.
Consider this information to help mitigate risk.
Fact One: The ERISA Bond
Also known as a fidelity bond, this insurance coverage for 401(k) plans is mandatory under ERISA, with specific requirements. Generally, the ERISA or fidelity bond must be equal to 10 percent of a plan’s assets as of the first day of the plan year or $500,000, whichever is less. If a plan’s investment options include the sponsoring employer’s company stock, then the maximum coverage increases from $500,000 to $1,000,000.
As examples, consider required ERISA bond coverage for the following 401(k) plans with a year-end date of December 31. If on January 1, a plan without company stock had assets valued at $3,800,000, the plan would need ERISA bond coverage of $380,000. Another plan without company stock and assets of $8,900,000 on January 1, 2019 would need $500,000 in coverage. And a third plan having company stock and assets of $12,400,000 on January 1, would need $1,000,000 in coverage.
It’s important to understand that the ERISA or fidelity bond protects a plan’s participants in case of fraud on the part of plan fiduciaries. It does not protect the fiduciaries should they be accused of illegal or imprudent activity. For that coverage, see Fiduciary Liability Insurance below.
Fact Two: IRS Form 5500
Each year, employers submit information about their 401(k) plan by filing the IRS Form 5500. For most plans, the Form 5500 is prepared by an outside service provider – a Third Party Administrator – but it is plan sponsor fiduciaries who sign the form and are responsible for its accuracy.
The Form 5500 requires plan sponsors to verify the plan carries an ERISA or fidelity bond and confirm the amount of the coverage it provides. Frequent errors are made in verification, and this can trigger a plan audit by the DOL as can a noncompliant coverage amount. Such a DOL audit will examine all plan aspects for compliance, not just ERISA bond coverage. That can mean headaches and potential penalties due to noncompliance in any plan area.
The good news is that ensuring accurate ERISA bond reporting is not hard. Plan sponsors should review carefully the Compliance Questions section of the Form 5500 where the bond verification and coverage amount are required. The question of verification is simply stated: “Was the plan covered by a fidelity bond?” Because it is one of the many questions in the Compliance Questions section to which a compliant answer is “no,” the fidelity bond question also is frequently answered “no” even when a plan is covered by an ERISA bond. When the question is answered “yes,” the Form 5500 then asks for coverage amount. That should equal 10 percent of the plan assets as of the first day of the plan year as reported on the Form 5500 or $500,000, whichever is less, unless there is company stock included in the plan.
Fact Three: Fiduciary Liability Insurance
While obtaining an ERISA bond is mandatory, obtaining fiduciary liability insurance is optional but considered a best practice. Unlike an ERISA bond, fiduciary liability insurance protects plan fiduciaries. It helps them defend against charges of illegal or imprudent 401(k) plan management. A plan’s fiduciaries are those who make decisions regarding a 401(k) plan – hiring service providers, selecting the investments that will be offered to participants, monitoring all plan fees and determining reasonableness, and administering the plan.
Fiduciary liability policies vary, and plan sponsors will want to consult with a commercial insurance agent on available coverages. Some policies will defend fiduciaries in lawsuits brought against them for their decisions and plan management. Other fiduciary liability insurance also will cover the expenses of employers in responding to a DOL audit or charge.
While plan fiduciaries may be doing everything right in the management of a company 401(k) plan, defending their actions in a court of law or before the DOL can be expensive. By contrast, liability insurance premiums are generally inexpensive.
Serving as a plan fiduciary – managing a company 401(k) plan – is an important responsibility, so important that failure to act prudently and compliantly can result in awards against a fiduciary’s personal finances. Fulfilling ERISA’s fiduciary bond requirements, reporting accurately on fiduciary bond coverage, and obtaining fiduciary liability insurance can help protect plan participant and fiduciary alike.
Written by Laurie C. Wieder, PPC®, Vice President, Alliant Wealth Advisors, Qualified Plans Division
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.