FIdelity Bonding Coverage

[stevena]

I have a client who just purchased fidelity bond insurance through CNA/Western. All of my other clients have fidelity bonds which are 3 year bonds for 10% of the plan assets. The premium is around $150-200 for the 3 years.

The clients insurance company was told by CNA/Western that they only sell one year bonds, and that they set it up so that the coverage of the bond is 10% of plan assets, but that they split the coverage among however many trustees there are. I never heard this before?? The premium is $500 PER YEAR! I thought at first that it was fiduciary liability insurance they were selling, but it is not...it is a fidelity bond. The plan is the named insured.

The agent told me that CNA/Western is the leading seller of ERISA bonds and that they know what they are doing. I felt kind of dumb and am wondering...is this normal? The agent called back CNA and told them what I said, that my clients have 3 year bonds on the PLAN, and that the coverage is not split amongst the fiduciaries. They told him "there was a right and wrong way to do things".

How are your clients plans bonded? Does $500 a year seem outrageous? This is a tiny little company so that is a LOT. I could get them a bond for $200 for 3 years, he is selling them a bond that will cost $1500 for 3 years.

[Blinky the 3-eyed Fish]

Why don't you call them and have them explain what they mean by "there is a right way and a wrong way.." and have them explain the differences? Your experiences with pricing are the same as mine.

[Kirk Maldonado]

I haven't researched this for a long, long time, but I thought that the bond was for the protection of the plan, not the trustees. Thus, I don't think that the amount of the protection can be divided by the number of the trustees.

[stevena]

Thanks, I did...they told me "they have heard nightmares about bonds being set up the way my clients are set up". Thats all they would say. But, as the agent said, they sell more ERISA bonds than anyone in the country. Which makes me think, are all my clients set up wrong?? All the insurance company would tell me is that it was the clients choice to buy it or not, and if they wanted to do it another way, that they "could go somewhere else."

They told me that EACH fiduciary should be bonded for 10% of the plan assets. However, then they told me they take 10% of the plan assets and split it among all the trustees (Not the same thing!)

ex., plan is 1 million assets, 2 trustees

each trustee, the way they set it up, is bonded for 50,000

if the requirement is that each fiduciary must be covered for 10%, than they should each have a seperate bond for $100,000 each.

When I gave the above example to the insurance company, they told me that covering each trustee for the full $100,000 would be the best thing to do (and would also cost over $1000 a year), the most conservative. But that their standard was to take the required 10% of plan assets and split it among all the trustees.

?????

[Belgarath]

We don't handle the bonding - we just tell them that they have to be bonded, and require that they confirm company and amount.

However, it seems to me to be common sense that each Trustee would have to be covered for the full amount of the required bond. Generally, at least in small plans, one Trustee can abscond/misuse all the funds - there's no plan restriction that limits the withdrawal amount per Trustee. So if you have 1 million in plan assets, I'd say that EACH Trustee must be bonded for minimum of 100,000.

On another note, I did see something a couple of weeks ago that indicated Trustee fidelity bond prices were going to skyrocket - the Enron effect - the bonding companies are scared of getting burned.

[stevena]

I guess the law requires one thing...and I am sure you could add a whole lot more if you wanted to.

But, what the law requires is that the PLAN is covered with a bond which has a payout of at least 10% of plan assets. The bond covers the PLAN, not the PEOPLE, right??

I just want to be sure my plans are complying with the law....

[Harwood]

The answer is probalby buried in DOL Reg 2580.412

Here is a small piece:

2580.412-16 Amount of bond required in given types of bonds or where more than one plan is insured in the same bond.

(b) When individual or schedule bonds are written, the bond amount for each person must represent not less than 10 percent of the funds "handled" by the named individual or by the person in the position. When a blanket bond is written, the amount of the bond shall be at least 10 percent of the highest amount handled by any administrator, officer or employee to be covered under the bond. It should also be noted that if an individual or group or class covered under a blanket bond "handle" a large amount of funds or other property, while the remaining bondable persons "handle" only a smaller amount, it is permissible to obtain a blanket bond in an amount sufficient to meet the 10 percent requirements for all except the individual, group or class "handling" the larger amounts, with respect to whom excess indemnity shall be secured in an amount sufficient to meet the 10 percent requirement.

[Harwood]

Form5500help.com has a 1995 DOL publication on Fidelity Bonds.

Check out DOL page 20 "Amount of Bond" and the example on page 21 [adobe acrobat page 11]

http://www.form5500help.com/fidelity_bonds.pdf

[Guest goldenchild]

In no order:

Fidelity bonds cover a Plan iteslf from loss, while fiduciary liability policies protect individual fiduciaries from liability for breaches of duty.

Although ERISA section 412 (the ERISA section that requires certain pension plans to hold fidelity bonds) speaks to fiduciaries being bonded, there is no requirement that the bond coverage limits be tied into the number of fiduciaries. Each fiduciary doesnt have to hold a bond, but the bond should provide (and most do) that anyone handling plan assets (like fiduciaries) is covered by the bond.

The bond has to list the Plan itself as a named insured and have coverage limits of 10% of funds "handled." Usually it is safe to say that the amount of funds "handled" includes all plan assets. No bond for a single plan has to exceed $500,000 in coverage.

Also, $500 is too much for a fidelity bond for one year for a small plan. It sounds like your broker is confused and is trying to sell you a fiduciary liability policy, which is not the same thing- liability policies are optional under ERISA, while bonds are mandatory.

[Guest FAQ]

I have a client with the same issue, with the same company (CNA/Western Surety). The bond is a "name schedule" bond, with a total amount of $500,000, but the coverage is divided among 4 named individuals. Each is covered only up to $125,000. (The plan has assets of over $5 million and is subject to the $500,000 maximum bond. Assume for these purposes that each named individual has power to authorize payments and therefore "handles" the entirety of the plan assets.)

It seems clear that this does not satisfy the regulations (the publication linked by Harwood mirrors the regs and notes that "when individual or schedule bonds are written, the amount of the bond specified for a given individual ... must be for at least 10 percent of the amount of plan funds handled by that individual.") Under the insurer's approach, if 100 employees were authorized to handle the entirety of the plan assets (unlikely), each would only be covered by a $5,000 bond.

It seems to me that the $500,000 bond should be based on an occurence, such that any single event triggering a loss is covered up to $500,000, regardless of the number of covered employees who participated in the act causing the loss.

Does anyone disagree? Am I missing something?