The Fidelity Bond vs. Fiduciary Insurance – Which one MUST you have?

Clients sometimes get confused between a fidelity bond vs. fiduciary insurance. They are not the same thing. One is mandated, one is not.

The ERISA Fidelity Bond

The fidelity bond protects the plan (not the plan’s fiduciary) from losses caused by fraud, dishonesty, misappropriation and/or embezzlement by people who work with 401(k), 403(b) defined benefit plans and funded welfare plans. ERISA requires that anyone who “handles funds or other property” of an ERISA plan be bonded unless an exemption is available. In fact, ERISA prohibits any person to “receive, handle, disburse, or otherwise exercise custody or control of plan funds or property” without being properly bonded.

The bond must have a minimum payout equal to at least 10% of the plan assets (maximum

$500,000). A plan with non-qualifying assets (such as real estate and limited partnerships) that exceed 5% of the total plan assets are required to carry a bond that covers 100% of the value of the assets in the plan.

The employer must obtain the fidelity bond only from a Department of Treasury approved surety (an insurance company) or reinsurer. In addition:

  • The plan fiduciaries cannot have any control or interest in the surety or reinsurer;
  • The bond must cover criminal losses (as described under ERISA); and
  • The bond cannot have a deductible. 

On the annual filing Form 5500, the Department of Labor annually asks a plan sponsor to confirm “Was the plan covered by a fidelity bond?” Without a fidelity bond in place, the fiduciary will need to come out of pocket for any plan losses.

Fiduciary Insurance

In contrast to the fidelity bond (which is mandatory) fiduciary insurance is optional. The fact that it is optional does not mean that you should not seriously consider obtaining this coverage. Remember that a plan fiduciary can be personally sued for fiduciary breaches. And each plan fiduciary is joint and severally liable for fiduciary breaches by any other plan fiduciary. All good ERISA litigation attorneys know this. Personal assets can be at risk. So fidelity insurance provides personal insurance for the plan fiduciary.


Employers sometimes think that “errors and omissions”, “directors and officers coverage” or their “umbrella policy” will satisfy the ERISA fidelity bond requirement. They do not. So if you sponsor a retirement plan or a funded welfare plan, know this:

  1. It is mandatory to have a fidelity bond equal to at least 10% of the plan assets (maximum $500,000). Note that there are some exceptions – plans that cover only the business owner, or the business owner and their spouse for example. Answering “no” on Form 5500 that you do not maintain the proper coverage can get the Department of Labor’s attention. That is not something that anyone wants, and;
  2. Fiduciary insurance is optional. Optional or not, for all employers that are responsible for handling any critical mass of participant assets, it is certainly prudent to obtain this protection.

Both policies can be obtained from your property and casualty broker.

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