All 401(k) plans are required to carry a fidelity bond under ERISA, but many plan sponsors are unclear on what it is, how much coverage is needed and how it applies to their plan. Understanding these requirements is an important part of maintaining compliance and preparing for an audit.
Do You Need a Fidelity Bond for a 401(k) Plan?
Yes. Nearly all 401(k) plans are required under ERISA to maintain a fidelity bond that protects plan assets from fraud, theft or dishonest acts.
What is a Fidelity Bond?
A fidelity bond is a type of insurance that protects a 401(k) plan against losses caused by fraud or dishonesty. It is designed to safeguard plan assets for participants and beneficiaries.
Unlike other forms of insurance, a fidelity bond specifically protects the plan itself rather than the employer or plan sponsor.
A fidelity bond is different from fiduciary liability insurance. While a fidelity bond protects against fraud or theft, fiduciary insurance covers errors or breaches in plan management.
Why Fidelity Bonds Are Required
ERISA requires fidelity bonds to ensure that individuals who handle plan assets are covered in the event of theft or misuse. This requirement helps protect participant funds and is a key component of overall plan compliance.
Fidelity Bond Requirements for 401(k) Plans
To meet ERISA requirements, a fidelity bond must meet the following conditions:
- The bond must be issued in the name of the 401(k) plan, not the plan sponsor
- The provider must appear on the U.S. Treasury Department’s approved surety listing
- Coverage must be in place for the entire plan year, including the first day
- The bond must cover at least 10% of plan assets
- Coverage is generally capped at $500,000
- Plans holding employer securities may require coverage up to $1,000,000
When Fidelity Bond Issues Show Up in an Audit
During a 401(k) audit, auditors will typically review whether a fidelity bond is in place and meets ERISA requirements. Failure to maintain an adequate fidelity bond is considered a compliance violation and may trigger additional scrutiny during an audit or regulatory review.
Common issues include:
- Bond coverage is below required thresholds
- Coverage was not maintained for the full plan year
- Bond is issued in the wrong name
- Plan asset growth has outpaced bond coverage
Addressing these issues early can help prevent findings during an audit.
What Happens If You Don’t Have One
Failing to maintain a required fidelity bond can expose plan fiduciaries to financial and regulatory risk. In the event of a loss due to fraud or dishonesty, the plan—and ultimately its participants—may not be protected. Fortunately, fidelity bonds are not expensive, and they are fairly easy to implement.
Ensuring your fidelity bond meets ERISA requirements is one of many areas reviewed during a 401(k) audit. Plan assets can grow quickly due to contributions and market performance, which can cause bond coverage to fall below required levels if it is not routinely reviewed.
Working with an experienced audit firm can help confirm your plan is compliant and identify potential issues before they surface.