To understand if your 401k plan has a fidelity bond on it, you need to first understand what a fidelity bond is. And even though the ERISA regulation isn’t actively enforced all of the time, it puts your company at risk for an audit!
A fidelity bond is a form of business insurance that offers an employer protection against losses that are caused by its employees’ fraudulent or dishonest actions. This form of insurance can protect against monetary, or physical losses.
Your company sometimes may have employees that don’t act in the best interest of the company and end up committing fraudulent acts. Your company itself may experience legal or financial penalties along with the individual employee or group of employees who committed the act. When companies are at risk of being exposed to these penalties, especially firms with a large number of employees, it’s wise to have fidelity bonds as insurance policies that cover firms for these damages.
The two types of Fidelity Bonds.
The two types of fidelity bonds are: first-party and third-party.
First-party fidelity bonds are employed to protect businesses against employees that act wrongfully with intention. This means fraud, theft, forgery, etc…
Third-party fidelity bonds are added to protect businesses against people working for them on a contract basis that are committing intentionally wrongful acts. This could be consultants, independent contractors, etc…
When a business is acting as a contractor or subcontractor, they are required to carry third-party fidelity bond coverage; though it’s most likely the other party who requires the coverage. In most cases, businesses in finance or banking require their contractors to hold third-party fidelity bond coverage to avoid losses from theft.
Different types of Fidelity Bond coverage
There are three main types of fidelity bond coverage:
- ERISA bonds: The Employee Retirement Income Security Act requires a fidelity bond of a minimum amount of 10% of the total plan assets up to a maximum bond of $500,000. This type of fidelity bond carries no deductible and is written in the name of the plan.
- Business Service bonds: When a business has employees that enter the premises of clients and customers they obtain these bonds to cover employee theft of client property.
- Dishonesty bonds: This is the classic form of fidelity bonding in two types of coverage:
- Blanket Coverage: This type of bond is written in the name of the business and has all of the employees covered. This is the best option for companies with many employees and high turnover rates.
- Scheduled Coverage: This type of bond is used when an organization is small and exposure is limited. It’s written in the name or position of an employee with a specific amount of coverage on each.
Fidelity bonds are often sold with inflation protection. The issue with this is that insurance companies are giving the impression that once purchased, the plan administrator doesn’t need to worry about having enough coverage. This is simply not true. Many times the plan significantly outpaces their inflation rate. Leaving the company under insured. We alway recommend checking the coverage annually to make sure it’s keeping up with the growth of the plan.
There are thousands of different bonds required throughout the United States. At Gate Key Financial we are focused on helping you find the right bond more quickly & easily by determining what bond is required on a municipality, city, or state level.