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The Employee Retirement Income Security Act known as “ERISA” regulates 401k and most other types of employee benefit plans. Under ERISA, anyone who handles plan funds must be covered by a fidelity bond. The bond protects the PLAN from losses that may result from fraudulent or dishonest acts.

Here are some important things to know about Fidelity Bonds.

An ERISA Fidelity Bond is not the same thing as Fiduciary Liability Insurance. The fidelity bond insures the retirement PLAN against losses due to fraud or theft by people who handle the plan’s funds or property. Fiduciary insurance, on the other hand, protects the fiduciaries themselves against losses due to breaches of fiduciary responsibility. It’s important to note that while many plan fiduciaries may have fiduciary liability coverage, ERISA doesn’t require it and it doesn’t satisfy the fidelity bonding requirement.
Not every fiduciary of the plan needs to be bonded.

The intent of the fidelity bond is to protect the plan from losses due to bad behavior by people whose roles and responsibilities involve handling funds or other property of the plan. So, a plan fiduciary who has no access to these processes or authority to direct funds would not be required to be bonded.

Let’s talk about Coverage Requirements

The amount of the required fidelity bond is 10% of the amount of plan funds the person handles. Since 2008, the maximum required bond has been $1,000,000. Buying more coverage is permitted, but that decision is a fiduciary act, too.

Something else to note here – Some retirement plans hold what are called non-qualifying assets. These are investments that include limited partnerships, artwork, collectibles, mortgages, real estate or the securities of “closely-held” companies. If a plan has more than 5% in these non-qualifying assets, the company needs either a bond amount equal to 100% of these assets or it needs to arrange for an annual full-scope CPA audit.

The plan can pay for Fidelity Bonds out of plan assets.

The named beneficiary of these bonds is the Plan, not the fiduciary. The bonds don’t protect the people handling plan funds or property and doesn’t diminish their obligation to the plan. Because of this, the plan is permitted to purchase Fidelity bonds from plan assets.

While this topic doesn’t get a lot of headlines, it’s an important one to help clients navigate. Talk to us about the details of sourcing and maintaining ERISA Fidelity Bonds.

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Most of us live in homes that were not custom-designed for us. We adapt to them rather than expect them to be optimized to how we like to live. Most retirement plans are sold the same way. Companies buy something off the shelf that was intended for a generic audience, but not necessarily ideally suited for them. The irony is that while these plans are sold as cost-efficient, they often wind up costing their buyers a great deal in the long run because of lost tax savings or retirement savings since they’re not optimized to their particular situation.

Aligning retirement plan design with a client’s goals means to listen and assess what their true goals are and then present a range of ideas that can best deliver what they need.
Plan designs can vary in important ways. For example, depending on the plan: contributions can be discretionary or mandatory. They can favor older employees over younger ones. They can accumulate a balance like a 401k or a promised benefit as in defined benefit plan. They can have modest limits on contributions or can go up to multiple six figures in DB and cash balance plans.

The key driver here is that unless a client is simply focused on the least expensive way to offer any sort of “retirement benefit,” then it warrants spending the time and effort to help them understand their choices and reaffirm the quality of relying on experts like us. If we don’t, we run the risk of failing to meet their goals and wind up leaving the door wide open to competitors. Let’s work together to keep that door closed.

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When it comes to the administration of retirement plans, most TPAs can execute the work pretty competently. And while there are differences in quality of process and internal expertise, most of this is technical work that happens behind the curtain. The result is that the vast majority of advisors, and clients for that matter, don’t generally see or perceive these differences.

Where we really differentiate are in three important areas you and your clients DO see and experience. It starts with primary orientation to be a consultative partner that listens and understands how to map the right plan design options to the right client to craft and optimize a retirement plan that can meet their tax and savings goals. We’re happy to work directly with you and clients to illustrate best options and provide expert guidance to get this right. After all, as Peter Drucker once said, “Efficiency is doing things well; Effectiveness is doing the right things.”

Once we have an agreement, clients experience our onboarding process. It’s an important opportunity to reaffirm the quality of the decision to do business with us- and you.

Then, of course, is the quality of the ongoing work and our communications about the periodic and annual operations of the plan. We’re here to support you and meet with clients to review performance and make recommendations to keep things on track.

Yes, some people say that winning new business is job one! We think that it’s just as important to demonstrate excellence in our support of existing relationships. That creates referrals, holds turf, and ultimately tells others why we’re a great partner. We’re here to help you win business – and keep it.

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There are some things that we’re happy to buy right off the rack. After all, mass production usually means consistency and cost-savings. On the other hand, when we do buy off the shelf, we compromise on individual choice and sometimes flexibility in getting the exact qualities and features we want. In retirement plan terms, that can be a good way to think about the difference between a bundled solution and an unbundled solution.

In a bundled approach, the client typically accepts a standardized plan design and one provider as recordkeeper, TPA, investment manager and custodian. Investment offerings are usually limited, and service delivery reflects the choices and qualities of the provider who may or may not be a leader in all facets of retirement plan work.

When we partner with investment professionals like you, together, we present a compelling unbundled alternative by offering expert and custom-tailored plan designs, broad open architecture options for investment lineups, and personalized, local service to support client relationships and help drive better results over time. We think that represents a superior offering.
The key is appreciating that both models make sense if they are well-designed and well-delivered and most importantly, if they are matched to the right client for the right reasons. We strongly believe that in many cases, a client benefits by the choice, flexibility and service quality of an unbundled approach. And by delivering a custom-tailored model, we’re better able to identify and serve each client’s unique needs and goals.

As always, we appreciate the relationship we have with you. Don’t hesitate to reach out to chat about how we can help you differentiate and grow your retirement plan practice.

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Your clients are familiar with the idea of an audit on their personal or corporate tax return, but they may not be familiar with an audit of their qualified retirement plan. There are two broad categories of plan audits. Today, we’ll focus quickly on two groups of plans that the Department of Labor requires to have financial statement audits by an independent qualified public accountant, or CPA.

These audits are based on a plan’s participant count or if the plan holds non-qualifying assets. The IRS or DOL also audit employee benefit plans based on questions about their operational compliance, but we’ll cover that topic in another chat.

The financial statement audit is triggered by participant count or non-qualifying assets. Generally, we think of a participant count of 100 or more as of the beginning of the year as the key. But, here’s how it actually works: If the participant count is over 120 an audit is automatically required. If it’s between 80 and 120, then the plan must engage an auditor if they did so in the prior year. We can help clients navigate the 80/120 rule based on their annual IRS Form 5500 filing information.

For purposes of the 100 participant rule, a participant is defined as any employee of the sponsor who is eligible to participate in the plan, AND any former employee who still has assets in the plan. In order to be considered an eligible participant, an individual does not have to contribute or receive employer contributions or otherwise have any activity in the plan in order to be included in the beginning of the year count. That’s important because it can include former employees if they still have an account balance. This reality, plus the annual plan cost of carrying former employees, encourages many plan sponsors to force out former employees with small balances.

The Department of Labor also requires small plans who have less than 95% of their assets in “qualifying assets” to obtain an audit, unless those assets are adequately covered by an ERISA fidelity bond.

A qualifying plan asset is generally one that is easily transacted on a public exchange, like the New York Stock Exchange or NASDAQ or that can be typically purchased from a bank or life insurance company or other regulated entity. Non-qualifying plan assets are investments in things like real estate, coin collections, fine art, a private business or other assets whose value is not easily determined.

If a plan does have more than 5% of its net assets invested in non-qualifying investments, it can avoid an automatic financial statement audit by purchasing an ERISA fidelity bond to cover the value of these assets.

Remember, the audits we’re describing here are financial statement audits performed by CPAs, not employee benefit plan audits conducted by the DOL or IRS. In any case, it’s always wise to remind clients to establish and maintain a prudent, professional, documented process to manage their retirement plan – and to follow it.

If you or your clients have questions about financial statement plan audits or want to learn more about how these rules affect the operation of their plan, please give us a call. We’re here to help.