the management and administration of employee benefit plans
The bonds mentioned above are at times intermingled, but have specific roles in how they are used. The Employee Retirement Income Security Act (ERISA) is a federal law enacted in 1974 that established minimum standards for plan administrators and investment advisers to protect employee pension and health plans in the private sector. The provisions of ERISA, which are administered by the U.S. Department of Labor, were enacted to address public concern that funds of private pension and other employee benefit plans were being mismanaged and abused. ERISA requires that plan officials who manage, oversee, recommend or handle funds or other property of an employee benefit plan must be covered by a personal fidelity bond. If a plan official commits fraudulent or dishonest acts, the bond ensures that the pension or health fund can recover some of its losses. The bond only pays if the fraudulent administrator is financially unable to meet the obligations.
Who must be bonded?
Every person who “handles funds or other property” of an employee benefit plan is required to be bonded unless covered under an exemption under ERISA. ERISA makes it an unlawful act for any person to “receive, handle, disburse, or otherwise exercise custody or control of plan funds or property” without being properly bonded.
Key factors of ERISA Fidelity Bond
An ERISA fidelity bond is a type of insurance that protects the plan against losses caused by acts of fraud or dishonesty. Fraud or dishonesty includes, but is not limited to, larceny, theft, embezzlement, forgery, misappropriation, wrongful abstraction, wrongful conversion, willful misapplication, and other acts.
Key factors of Fiduciary Liability insurance
Fiduciary liability insurance insures fiduciaries, and in some cases the plan, against losses caused by breaches of fiduciary responsibilities. Although many plan fiduciaries may be covered by fiduciary liability insurance, it is not required and does not satisfy the fidelity bonding required by ERISA.
Fiduciaries can also be held liable for the acts, errors, and omissions of outside entities that provide administrative and related services. Outside entities representing this exposure include those organizations that service pension and benefit plans: consulting and actuarial consulting firms, law firms, accounting firms, professional administration firms, investment advisers and investment management companies, and the trust departments of financial institutions.
The coverage provided by Fiduciary liability insurance includes the cost of defending those claims that seek to establish liability from the wrongful acts. Most popular is a stand-alone form or separate fiduciary liability policy.
Fidelity Bonds and Employee Benefits Liability
- Fidelity bonds are required by law (ERISA bonding) and are a form of insurance for the dishonest acts of plan officials.
- Employee benefit liability (EBL) insurance covers many claims arising out of errors or omissions in the administration of a benefit plan, including the failure to enroll an employee in the plan as well as the administration of improper advice as to benefits.
- EBL insurance does not cover all situations of fiduciary responsibility, especially those regarding imprudent investment of funds. Fiduciary liability insurance coverage may or may not encompass EBL insurance coverage—the insurer involved, the purchasing entity, and the specific type of fiduciary liability coverage being employed will ultimately determine what scope of coverage is available.
Similar coverage may also be established using directors and officers (D&O) liability, commercial general liability (CGL), or trust E&O/professional liability policies as long as those policies have an endorsement attached specifically tailored to cover fiduciary liabilities. Most D&O policies exclude ERISA claims. Simple removal of such exclusion would provide coverage to directors and officers in their fiduciary capacity with respect to employees, but would offer far less broad coverage than an endorsement which also protects the plan itself, the corporate sponsor and individual non-officer fiduciaries. Not all endorsements of the various liability policies are created equal. Consult with your insurance broker to make certain the coverage is tailored to your individual business.
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For more information on ERISA bonds and Fiduciary Liability Insurance, contact The Armstrong Company Insurance Consultants.
Source: US Department of Labor, IRMI