Bonding Requirements

[Guest Thornton]

An client of mine is setting up a new 401(k) plan. He is an unincorporated dentist with 5 employees, including his wife. Initial plan assets, including rollovers, will total about $200,000. He and and his wife will have about $150,000 of the total. He called his insurance carrier to purchase a bond and was told $1,000 of coverage (the minimum) was enough rather than $2,000since his and his wife's assets are not included in plan assets for bonding purposes.

I have never heard this before, and can find nothing to support this position. Can anyone shed some light on this? Thanks.

[Belgarath]

I agree with you. And even you agree with the broker's position that you don't have to count the 150,000 (which is wrong) you'd still have to bond for 10% of $50,000. I'm no actuary, but in my book, that comes out to $5,000. So I think the broker fails on all counts.

Ask the broker to give statutory/regulatory support for his/her position - I expect the tune will change.

Perhaps your client didn't really communicate the proper information to the broker. (I'm trying to give them the benefit of the doubt, as it is most unusual for a broker to attempt to sell LESS than the required amount...)

[Mike Preston]

I think the insurance agent is just a bit confused about the bond. They may not be familiar with an ERISA bond. They should call somebody familiar with ERISA bonds and go from there.

By the way, aren't your numbers off by a factor of at least 10? With $200,000 in assets the bond should be $20,000, at the least, not $2,000. Maybe even more if the assets include things other than marketable securities.

In fact, it is usual to procure a bond for something in excess of 10 times the current market value to account for growth in the assets.

[Guest Thornton]

Sorry about the numbers thing. It's $20,000 bond that is needed.

[Blinky the 3-eyed Fish]

The difference in the price of a $5,000 bond or a $20,000 bond will buy you lunch at Taco Bell and maybe a soda.