What Is the Purpose of a Fidelity Bond?

If your company offers a retirement plan like a 401(k), you’ve probably come across the term fidelity bond. It might sound like a small detail, but it plays a big role in protecting your employees’ retirement savings. 

A fidelity bond is a special type of insurance that helps protect a retirement plan from theft or fraud. It’s required by law under ERISA, and it’s something every plan sponsor needs to understand. In this post, we’ll break it down in simple terms and explain how it helps keep your plan compliant and your participants protected. 

What Is a Fidelity Bond? 

A fidelity bond is not for the company or the plan administrator. It’s for the retirement plan itself. If someone who has access to the plan’s money acts dishonestly or steals funds, the bond helps cover that loss. That includes situations like embezzlement, forgery, or other types of fraud. 

This type of bond is required by the Department of Labor for most qualified retirement plans. It's one of the safeguards in place to help protect participants from financial harm caused by someone misusing plan assets. 

Who Needs to Be Bonded? 

The rule applies to anyone who “handles” plan funds or property. That can include employees, officers, or even third parties who: 

• Have access to plan funds or accounts 

• Approve or sign checks 

• Make investment decisions 

• Process participant contributions or distributions 

  
  

In some cases, even if a third-party provider handles the day-to-day administration, someone in your company might still need to be bonded. Think about who can move money, authorize payments, or access participant information. Those are the roles that may need to be covered. 

How Much Coverage Do You Need? 

The minimum required coverage is 10% of the amount of plan assets someone handles, with a minimum bond of $1,000. The maximum amount required by law is $500,000, unless your plan holds company stock. If that’s the case, the maximum goes up to $1 million.  You may also have to increase the bond amount if your plan holds assets that are not traded on the U.S market exchange. 

For example, if your plan holds $3 million in assets, the bond should cover at least $300,000. If the plan grows or changes, you may need to adjust the bond amount to stay compliant.   

It’s worth taking a look at the bond amount on a regular basis, especially as your plan grows over time.  You can also purchase a bond with inflation guard, so if the assets grow, you will automatically be covered without physically having to update the bond amount. 

Fidelity bonds protect retirement plans from financial losses caused by dishonest actions of plan managers.

Why Does This Matter? 

Fidelity bonds are not just about checking a box. They serve a real purpose. They help protect retirement plan participants from losses if someone who handles their money makes a dishonest move. 

They’re also required by federal law. If your plan is audited and the bond isn’t in place or doesn’t meet the coverage requirements, you could face penalties or be required to take corrective action. 

A proper bond helps give employees peace of mind. It shows that your business is doing the right thing when it comes to safeguarding their retirement savings. 

Fidelity Bond vs. Fiduciary Liability Insurance 

Many plan sponsors confuse these two, so let’s clear it up. 

A fidelity bond protects the plan against loss caused by dishonest acts. It’s required by law. 

Fiduciary liability insurance, on the other hand, protects the individuals managing the plan if they’re sued for errors or breaches of duty. It’s not required, but it can be helpful depending on your situation. 

The important thing to remember is that one does not replace the other. You may want both, but the fidelity bond is the legal requirement under ERISA. 

How RPCSI Can Help 

Staying on top of retirement plan requirements can be tough. That’s why we help our clients stay informed about the details that matter—like fidelity bonds. 

At RPCSI, we help plan sponsors: 

• Review who needs to be bonded 

• Determine the right bond amount 

• Keep up with changes as the plan grows 

• Avoid problems before they happen 

  
  

If you’re not sure whether your current bond meets the rules, or if you’ve never really looked into it, that’s a good reason to reach out. We’re happy to take a look and talk through it with you. 

If you need to obtain a fidelity bond or renew yours, you can visit our website under Our Services and request a quote from a Bond Issuer (Colonial Bonds and Insurance) 

Let’s Talk About Your Plan 

We’re here to help you protect your retirement plan and the people who count on it. If you have questions about fidelity bonds or want us to take a look at your plan’s setup, call us at 260-484-0848 or visit www.rpcsi.com.