Fidelity Bond

[thepensionmaven]

At least half a dozen client call me every other week asking why a Fidelity Bond is needed on an individual account plan and the participant is in charge of his/her own investments.

Apparently the DOL is looking at Sponsors who do not check the appropriate box on Form 5500, and one client has received a letter advising the client that he has 15 days within which to obtain one.

If the participants are responsible for investing their own accounts, technically, why is a Fidelity/Fiduciary Bond necessary.

In the old days before individual accounts, it is entirely understandable.

To this day, a handful of insurance companies are still saying that as long as the plan invests in insurance company contracts, i.e. annuities, a Fidelity Bond is not necessary.

As a TPA trying to follow the letter of the law, we are told we do not know what we are talking about when it comes to this issue.

Any thoughts.

[Lou S.]

The short answer is it is required by law.

And the bond doesn't protect against losses from poor investment due to individual direction, it protects the participants from theft by a plan official with access to their account.

[My 2 cents]

The short answer is it is required by law.

And the bond doesn't protect against losses from poor investment due to individual direction, it protects the participants from theft by a plan official with access to their account.

Agreed - the main reason behind having a fidelity bond is to insure that if a plan official embezzles funds (or someone else steals from the account), the participants are protected. Just because a participant issues detailed instructions for the investment of his or her account does not mean that the money cannot be stolen. How do you think the participants of a plan whose trustees are swindled by a Ponzi scheme are to going to get their money back?

[Mike Preston]

Point whoever it is that is claiming you don't know what you are talking about to:

http://www.dol.gov/ebsa/regs/fab2008-4.html

When their eyes glaze over tell them that the general requirement for bonding is allowed to be waived by various sections of the regs (see 2580.312-31 for the specific exemption applicable to insurance companies).

There is also a nuanced issue that you won't see directly addressed in a regulation, but the above mentioned FAB2008-4 contains a reference in Q14. And that is that a bond is generally required to protect "plan assets" and the exemptions in the regs are applicable only if the contributions to the plan are made from the general assets of the plan sponsor without those amounts first becoming plan assets. There are other regs that essentially say that monies withheld from paychecks (think 401(k) deferrals) morph into plan assets in a very short period of time (at this writing I think the safe-harbor is after 7 working days). Hence, even if a 401(k) plan were to be solely invested in insurance company products and would otherwise qualify for an exemption, the employer would be subject to the bonding requirement should any deferrals be forwarded "late". To my knowledge I've never seen the DOL try to go after an employer finding itself in this position.

[Tom Poje]

please see the post under the following thread under the 5500 forum.


http://benefitslink.com/boards/index.php/topic/57538-dol-emailing-clients-directly-regarding-fidelity-bond-coverage/

In could be it is not even the DOL requesting this, but, as I would read it, a company trying to sell fidelity bonds. remember, since 5500s are open to inspection, anyone can see them and search for those plans that checked 'no' to question if the plan was covered by a fidelity bond. that still doesn't mean the plan shouldn't have a bond (at least in most cases)