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The Consequences of Insufficient Fidelity Bond Coverage in a 401(k) Plan

One common compliance issue that often slips through the cracks in retirement plan oversight is insufficient fidelity bond coverage. Many plan sponsors, particularly those dealing with micro and small 401(k) plans, often make this mistake. Although this may seem like a minor oversight, the ramifications can be severe and far-reaching.

An ERISA fidelity bond, also referred to as a fidelity bond, is a type of insurance that protects your retirement plan against losses caused by acts of fraud or dishonesty. ERISA- the Employee Retirement Income Security Act of 1974 - mandates this coverage, and the Department of Labor (DOL), through ERISA section 412, requires every fiduciary of an employee benefit plan to be covered.

Failure to maintain adequate bond coverage is a substantial compliance risk, as the IRS has identified this as one of the two most common compliance issues among plans. Some of the undesirable consequences of insufficient fidelity bond coverage in a 401(k) plan can include:

  1. DOL Audit Risk: Reporting an insufficient bond on the Form 5500, an annual report of employee benefit plan's financial conditions, investments, and operations can trigger a plan audit. This could reveal other compliance issues and potentially result in significant penalties or lawsuit.
  2. Personal Liability: Not having the required ERISA bond in place is a violation of ERISA law. Plan fiduciaries can also be held personally liable for losses that would have been otherwise covered by a fidelity bond.
  3. Legal Penalties: In some DOL cases, fines and imprisonment were the final outcomes for parties found guilty of breaching fiduciary duties.
  4. In case of a significant loss, your retirement plan may need a costly "CPA Audit."

When considering these adverse and impactful outcomes, ensuring ample fidelity bond coverage should be a top priority for all plan administrators.

Avoid getting caught up with inadequate coverage by regularly reviewing your plan. Bonding companies often offer multi-year coverage options that can save cost and provide peace of mind, knowing that your bond will remain compliant for its lifetime.

It's crucial to remember not just to protect the assets of the retirement plan but also yourself from personal liability. Consider complements to your ERISA bond like fiduciary liability coverage, which can protect your assets in case of an alleged fiduciary breach.

In the age of ever-evolving technology, it's also prudent to consider adding cyber liability coverage to ensure your company and plan are safeguarded from losses and expenses in the unfortunate event of a data breach.

If you navigate through the compliance maze meticulously and maintain diligent oversight of your plan's requirement, swift audits and devastating penalties can be confidently avoided. It's not just about securing the present; it's about insuring the future. In the realm of 401(k) management, errs on the side of caution always pay off.