People often confuse fidelity bonds and fiduciary insurance, so today I’d like to clarify the difference between them. First, one of them is required, while the other is not.

A fidelity bond is mandated by ERISA, the Employee Retirement Income Security Act, which is a federal retirement law put in place back in 1974. It is important to note that a fidelity bond protects the plan, not the fiduciaries or trustees of the plan. This bond protects the plan from losses caused by fraud, dishonesty, misappropriation, or embezzlement.  A fidelity bond must have a minimum payout equal to at least 10% of the plan’s assets. A plan with special assets, such as real estate or limited partnerships, that exceeds 5% of the total plan assets must carry a bond that covers 100% of the plan assets.

Fiduciary insurance, on the other hand, is optional. It can be obtained to protect a plan fiduciary. Some trustees and fiduciaries are not aware that they may be sued personally for their actions or lack thereof regarding the plan. Said another way, employees can sue the fiduciaries hired by the employer for the decisions the fiduciaries make regarding the retirement plan.

A fiduciary’s personal assets (like their home, savings, etc.) are all fair game if they are sued regarding a plan. This is why some fiduciaries decide to buy insurance to protect themselves.

As an additional note, employers think that their errors and omissions (E&O) or their directors and officers coverage will satisfy the ERISA fiduciary bond requirement. Most of the time, this is not the case, and they have a false sense of security. It’s extremely important to examine these coverages very closely to ensure that they have the proper fidelity bond in place.

If you have any questions about these topics, please feel free to reach out to me. I’d be glad to explain in more detail.