Fidelity bond vs. fiduciary insurance

Offering an employee benefits plan is a great way to boost morale and attract top-tier talent. However, these plans can also make you vulnerable to lawsuits stemming from ERISA regulations.

The Employee Retirement Income Security Act of 1974 (ERISA) is a federal law that establishes minimum standards for most private industry health, retirement, and other benefit plans, protecting participants’ best interests. It mandates that plan sponsors must:

• Provide participants with important information
• Establish grievance processes
• Give participants the right to sue for benefits or breaches of fiduciary duty

If someone with access to an employee benefit plan mismanages or steals the assets, you could be held liable.

However, when it comes to having the right protection, many small business owners become confused about the difference between fidelity bonds and fiduciary insurance. While they’re both tied to ERISA requirements and fiduciary responsibilities, they protect against very different risks.

When a small business offers retirement or other employee benefit plans, fidelity bonds are federally mandated under ERISA. Also known as surety bonds, fidelity bonds are a type of business bond that protects participants, funds, and other property of the plan from fraud, theft, or other dishonest acts committed by plan fiduciaries.

For example, if a fiduciary who oversees a company's 401(k) plan diverts funds into their own account, the fidelity bond would cover losses from that person’s deliberate wrongdoing.

It’s important to note that fidelity bond coverage doesn’t protect plan administrators, it only protects plan participants and their assets.

Fiduciary liability insurance protects fiduciaries and organizations from claims related to errors, omissions, professional negligence, or breaches of fiduciary duty in the management of employee benefit plans. Lawsuits can come up if a plan’s fiduciary fails the standard of care, such as:

• Making poor investment choices
• Failing to diversify investments
• Mismanaging plan records
• Hiring negligent plan service providers

Although ERISA does not mandate it, fiduciary liability coverage is highly recommended for business owners who offer employee benefit plans. For example, if you select a retirement plan with excessive fees and your employees sue for losses, fiduciary insurance will help pay for your attorney’s fees, settlements, or judgments.

Here’s a side-by-side breakdown of the key differences between fidelity bonds and fiduciary liability insurance.

With so many types of policies and terms, insurance can get confusing. Here are two policies small business owners often mistake for fidelity bonds or fiduciary liability insurance coverage:

Also known as professional indemnity insurance, an errors and omissions (E&O) policy covers legal defense costs if your company is sued over mistakes, oversights, or professional negligence regarding the professional services or advice you provide, but not tied to employee benefit plans.

A directors and officers (D&O) policy protects company leadership, including officers and board members, against claims around mismanagement of the company itself. Many D&O policies exclude fiduciary liability claims, so it’s important to understand what your policy covers.

Yes, fiduciary liability insurance is highly recommended even if you have a fidelity bond, because the two policies offer very different types of coverage, and both are critical pieces of a risk management strategy.

Fidelity bonds are legally required if your small business has a retirement plan. This coverage protects the assets in an employee benefit plan in case of fraud or theft.

Fiduciary insurance isn’t required, but if your company offers an employee benefit plan, it’s smart to protect yourself from employee lawsuits stemming from mismanagement of funds.

Plus, many small businesses rely on just one or two people to manage retirement plans, which increases the risk of error and fraud.

It's easy to get free quotes for fidelity bonds and fiduciary liability coverage with Insureon. We'll ask for basic facts about your business to help find affordable coverage to match your risks, budget, and state requirements.

For most policies, you can get quotes through our online application. If you're not sure what types of insurance policies your business needs, you can speak with a licensed insurance agent. Once you choose your insurance products, you can usually get coverage and your certificate of insurance (COI) within 24 hours.