ERISA Fidelity Bond

An ERISA fidelity bond is a special fidelity bond mandated by Section 412 of the Employee Retirement Income Security Act (ERISA). It protects a covered employee benefit plan — most commonly a 401(k) or other retirement plan — against losses caused by fraud or dishonesty committed by any person who "handles" plan funds or other property. "Handling" includes anyone with authority to receive, disburse, sign checks for, or exercise control over plan assets, whether they are employees, trustees, or third-party administrators. Unlike ordinary commercial coverage, this bond exists to protect the plan and its participants, not the employer, and it is a legal compliance requirement rather than an optional purchase.

For a small-business owner sponsoring a retirement plan, the sizing rules are the practical heart of the requirement. The bond must equal at least 10% of the amount of plan funds handled in the preceding year, subject to a minimum of $1,000 and a maximum of $500,000 per plan — raised to $1 million when the plan holds employer securities. The required amount is recalculated each plan year, and the Form 5500 filing asks whether an adequate bond is in place, so an under-bonded plan is a visible compliance flag to the Department of Labor. Because the bond protects participants, it cannot carry a deductible that shifts the first-dollar loss back onto the plan.

The most common mistake owners make is confusing this bond with fiduciary liability insurance — they are not the same thing. The ERISA bond covers theft and dishonesty only and protects the plan; fiduciary liability insurance covers the personal liability of plan fiduciaries for breaches of duty (imprudent investments, improper administration) and protects the fiduciaries themselves. A prudent plan sponsor typically carries both. Because ERISA bonds are inexpensive relative to the compliance risk of skipping them, they are usually purchased alongside crime coverage and reviewed each year to keep pace with growing plan assets.