ERISA generally requires that every fiduciary of an employee benefit plan, including 401(k) plans, and every person who handles funds or other property of employee participants shall be bonded. The bonding requirement aims to protect employee benefit plans from risk of loss due to fraud or dishonesty by persons who "handle" plan funds or other property. These individuals are called "plan officials" and include anyone who has:
** Physical contact with cash, checks, or other Plan property.
** Power to transfer or negotiate Plan property for a price.
** Power to disburse funds, sign checks or produce negotiable instruments from the Plan assets.
** Decision-making authority over any individual described above.
The fidelity bonds are inexpensive, costing about $200 per year. A fidelity bond should cover approximately 10% of a small company's 401(k) assets. Assuming the typical small company has a 401(k) valued at $500,000, a fidelity bond for this plan would cost the employer only about $100-$200 per year. And, like all aspects of ERISA, there are important exceptions that can negate the need for a fidelity bond altogether.
As an aside, we have provided 401(k) plans to small businesses and companies for over 30 years. In most cases, we also file their annual IRS Form 5500-SF. About 60% of our clients have never purchased a fidelity bond.
When we get to the section of the annual IRS Form 5500-SF that asks a "yes" or "no" question about the 401(k) being covered by a fidelity bond, this 60% of 401(k) Easy clients say "no," and that is the way we file their Form 500-SF. In all our years as a 401(k) provider, we have never seen a "no" answer cause any problems for our clients who answered "no" and decided to manage their 401(k) without a fidelity bond.
We are unaware of any small company that has been penalized or contacted by the IRS concerning not having a fidelity bond. We convey this information to inform you that getting a fidelity bond is your decision, not ours. Whether to have a 401(k) fidelity bond or go without is yours. We feel it is helpful to inform you about our experience; we have not had a fidelity bond for our company's Pension Systems Corporation 401(k) since its inception, with no negative consequences in the past 30 years.
If you are a 401(k) plan sponsor, fiduciary, or trustee and would like more information or referrals to vendors of an easy-to-purchase, low-cost fidelity bonds please get in touch with us at (800) 660-0050 or by email, or this website.