Helping Client Choose ERISA Bond Coverage

This new client came to me and needs to update their ERISA bond coverage.   The plan had $800K in 2022... probably less now due to the investment performance.  I've attached a copy of the screenshot he sent to me.   What do people recommend?  Just a stand alone bond or a bond + Fiduciary Liability?   or maybe a bond + Fiduciary Liability + Cyber liability.   As you can see each option that he was given includes all 3 options.

Thanks

Bond Coverage Options - Copy.pdf

There is no one right answer that is going to apply to all employers. It depends on this particular employer's appetite for risk, their assessment of the likelihood of experiencing a covered loss, and their ability to cover losses without regard to the insurance.

Cyber security insurance is strongly recommended, however there is no need that the insurance be obtained from the same vendor that provides their ERISA fidelity bond. The employer might want to see if they already have insurance that would cover cyber-related losses to the plan, or consider shopping around before making a decision.

1 hour ago, C. B. Zeller said:

It depends on this particular employer's appetite for risk, their assessment of the likelihood of experiencing a covered loss, and their ability to cover losses without regard to the insurance.

Showing my naivety - I get appetite for risk.  What losses would be "covered"?  This plan has individual brokerage accounts.  Would the loss be if the financial advisor is incompetent and the participant loses a certain percentage of their account so decides to seek retribution?  

That is a question for the insurer. Read the actual contract - it will define what is and isn't a covered loss.

In a overly simplistic summary, the required ERISA fidelity bond is coverage for any plan official who receives, handles, disburses, or otherwise exercises custody or control over plan funds.  This can include employees who handle payroll-based deferrals, pay expenses out of the plan, or process other similar transactions.  The purpose of the ERISA fidelity bond is to protect the plan against fraud or dishonesty.

Fiduciary Liability coverage is not required.  It provides coverage for individuals who are fiduciaries of the plan, and as fiduciaries are personally liable for their actions or inaction.

Cyber Security coverage is not required.  It provides coverage to the plan or to the plan sponsor for losses attributable breaches in cyber security.  This coverage often requires that the covered entity has implemented and actively manages cyber security controls.

The ERISA fidelity bond is cheap relatively speaking and often is used as a foot in the door to offer the other coverages.  The cost for each of the other two coverages is increasing as losses continue to mount, and it pays to shop this coverage together with similar coverage for executives and for company cyber security coverage.

CB Zeller is on target - ask questions before you buy.  If this is all new to you, shop around, and talk to at least three providers.  Buy with eyes wide open.

Even if neither cybersecurity insurance nor fiduciary liability insurance is statute-prescribed, fidelity-bond insurance is.

The Employee Retirement Income Security Act of 1974 makes it a fiduciary breach (and a Federal crime) for a person to handle plan assets or serve as a plan’s fiduciary unless the person is “bonded” with sufficient ERISA fidelity-bond insurance.

(Perhaps because both labels begin with the letter “F” and use a word derived from Latin, many people confuse fidelity-bond insurance and fiduciary liability insurance. They are different kinds of insurance for different losses. Fidelity-bond insurance covers a theft.)

The minimum fidelity-bond insurance coverage ERISA expressly requires is 10% of the amount the covered person handles, except that the statute ordinarily does not expressly require more than $500,000 or, if the plan holds employer securities or is a pooled-employer plan, $1 million; and requires at least $1,000 (even if the amount the covered person handles is less than $10,000).

Fidelity-bond insurance is a plan’s expense, which may be paid from the plan’s assets.

A fiduciary who knows another fiduciary breached a duty to get fidelity-bond insurance, or to require an employee, agent, or other service provider to be bonded, is liable for not making reasonable efforts to remedy the other fiduciary’s breach. That liability might include restoring the plan’s loss that would have been insured.

ERISA permits, but does not require, fiduciary liability insurance. A fiduciary must at least consider obtaining this insurance, and should buy it if in the plan’s circumstances an experienced fiduciary acting with the care, skill, prudence, and diligence ERISA requires would do so.

A retirement plan may buy fiduciary liability insurance “if such insurance permits recourse by the insurer against the fiduciary in case of a breach of a fiduciary obligation by such fiduciary.” If the insurance contract permits (or at least does not preclude) the insurer’s recourse against a breaching fiduciary, the “premium”—insurance jargon for the price one pays for insurance coverage—may be paid by the plan.

If an insurance contract precludes recourse against a breaching fiduciary, a retirement plan cannot pay the portion of the insurance price that is attributable to the non-recourse provision. An insurer might allow more than one payer to pay the insurance price, and might, for the payers’ convenience, allocate the overall price into portions—a price attributable to the incremental value of the non-recourse provision, which is the price to be paid by a person other than the plan; and a price that is the difference between the total price and the price of the non-recourse provision—that is, the portion of the price that can be paid from a plan’s assets without violating ERISA.

For more information, see chapter 6 in ERISA: A Comprehensive Guide (Wolters Kluwer).

That's great info.  Appreciate the responses!