A fidelity bond and fiduciary liability insurance cover different risks to an employee benefit plan: the bond reimburses the plan when someone steals from it, and fiduciary liability insurance pays the legal costs and damages when a plan manager is sued for a professional mistake. ERISA requires the bond for virtually every plan that holds assets. Fiduciary liability insurance is voluntary. Most plan sponsors carry both, because neither product fills the gap left by the other.
What a Fidelity Bond Covers
A fidelity bond protects the plan itself against losses caused by fraud or dishonesty. That includes theft, embezzlement, forgery, misappropriation, and similar acts by anyone with access to plan funds.1U.S. Department of Labor. Protect Your Employee Benefit Plan With An ERISA Fidelity Bond It works as first-party coverage, meaning the bond pays the plan directly for whatever was taken. If a payroll manager diverts contributions into a personal account, the bond reimburses the plan for the missing money.
Coverage reaches beyond regular employees. Anyone who handles plan funds or has decision-making authority that creates a risk of loss must be bonded, including third-party administrators, trustees, and service providers.1U.S. Department of Labor. Protect Your Employee Benefit Plan With An ERISA Fidelity Bond The critical limitation: a fidelity bond only responds to intentional dishonesty. Market losses, poor investment returns, and administrative mistakes sit outside its scope. If no one committed a dishonest act, the bond doesn’t pay.
What Fiduciary Liability Insurance Covers
Fiduciary liability insurance picks up where the fidelity bond leaves off. It covers claims that a plan fiduciary breached the duties ERISA imposes: acting prudently, acting solely in participants’ interests, diversifying investments to minimize large losses, and following the plan documents.2Office of the Law Revision Counsel. 29 USC 1104 – Fiduciary Duties These are negligence-based claims, not criminal ones. A fiduciary who selects an unreasonably expensive fund lineup, fails to enroll a participant on time, or gives incorrect benefit information faces exactly the kind of lawsuit this insurance is built for.
The policy pays for defense attorneys, settlements, and court-ordered damages. Defense costs alone can run into six figures in complex ERISA class actions, and fiduciary liability insurance absorbs that expense. It does not cover intentional fraud or theft. If a fiduciary deliberately steals from the plan, that claim falls under the fidelity bond instead.3The Hartford. Fiduciary Liability Insurance Guards Against Mismanagement Claims The two products are mirror images: the bond handles dishonesty, and the insurance handles honest mistakes with expensive consequences.
Employee Benefits Liability Isn’t a Substitute
Some plan sponsors assume the Employee Benefits Liability (EBL) endorsement on their general liability policy covers them. It doesn’t. EBL covers administrative processing errors like sending the wrong enrollment form or miscalculating a benefit payment. A standalone fiduciary liability policy covers breach-of-duty claims, which tend to be far more severe and carry the risk of personal liability for individual fiduciaries.4Chubb. Myths vs. Realities: Fiduciary Liability Insurance Relying on EBL alone leaves individual fiduciaries personally exposed to the most damaging claims.
Who Each Product Protects
This is the distinction that trips people up most often. A fidelity bond protects the plan and its participants. The money flows to the plan trust to replace stolen assets. It does nothing for the individual who caused the loss, and it does nothing for the fiduciary accused of making a bad decision.
Fiduciary liability insurance protects the fiduciaries themselves. Without it, a fiduciary found to have breached ERISA’s duties faces personal liability for the resulting losses. That can mean paying out of pocket for attorney fees, settlements, and judgments. The policy also shields the sponsoring company’s balance sheet from the cost of defending participant lawsuits. One point worth keeping in mind: the policy typically does not extend to outside advisers, consultants, or plan administrators. Those providers are responsible for securing their own coverage.3The Hartford. Fiduciary Liability Insurance Guards Against Mismanagement Claims
What ERISA Requires for the Bond
Federal law makes fidelity bonding mandatory for every fiduciary and every person who handles funds or other property of an employee benefit plan.5Office of the Law Revision Counsel. 29 USC 1112 – Bonding This is not optional and not limited to large plans. If your plan holds any assets, the people who touch those assets need a bond.
The bond amount must equal at least 10 percent of the funds the covered person handled during the preceding plan year, with a floor of $1,000 and a ceiling of $500,000.5Office of the Law Revision Counsel. 29 USC 1112 – Bonding For plans that hold employer securities, the Pension Protection Act of 2006 raised that ceiling to $1,000,000.6U.S. Department of Labor. Field Assistance Bulletin No. 2008-04 Recalculate the required amount at the start of each plan fiscal year.
The bond must come from a corporate surety company listed on the Department of the Treasury’s approved surety list.7Bureau of the Fiscal Service. Surety Bonds The plan itself must be named as an insured party on the bond so it can recover directly if a loss occurs.1U.S. Department of Labor. Protect Your Employee Benefit Plan With An ERISA Fidelity Bond A limited set of entities, including certain regulated banks, trust companies, and broker-dealers, are exempt from the bonding requirement, as are plans that pay benefits exclusively from the employer’s or union’s general assets.5Office of the Law Revision Counsel. 29 USC 1112 – Bonding
Who Pays the Premiums
The rules on who can pay for each product differ in ways that matter for plan compliance.
Fidelity bond premiums can be paid from plan assets. Because the bond protects the plan rather than the individual, the Department of Labor treats the purchase as a reasonable plan expense. The bond does not relieve any covered person of their obligations to the plan, so there’s no conflict of interest.1U.S. Department of Labor. Protect Your Employee Benefit Plan With An ERISA Fidelity Bond The employer can pay out of its own pocket instead.
Fiduciary liability insurance premiums can also come from plan assets, but only if two conditions are met. The plan document must explicitly permit it, and the policy must include a recourse provision giving the insurer the right to seek reimbursement from any fiduciary whose breach caused the insurer’s payout. If either condition is missing, the employer must pay the premiums from its own funds. When the employer pays, no recourse provision is needed because the plan’s assets aren’t at stake.
Reporting the Bond on Form 5500
Plan sponsors must disclose their fidelity bond coverage on the annual Form 5500 filing. The schedules ask whether the plan is a named insured under a fidelity bond from an approved surety and require the aggregate amount of bond coverage.8U.S. Department of Labor. Instructions for Form 5500 Answering “no” to the bond question is a red flag that can trigger a DOL inquiry.
ERISA doesn’t specify a fixed civil penalty for failing to maintain the required bond. In practice, consequences have ranged from DOL auditors directing the plan sponsor to obtain a bond immediately, to court orders removing unbonded fiduciaries and even terminating the plan. The lack of a defined penalty doesn’t make this a low-risk compliance gap. It means the DOL has broad discretion in how aggressively it responds.
Where Both Products Leave Gaps
Neither product covers every risk a benefit plan faces. A few areas sit outside both:
- Cyber theft. A standard ERISA fidelity bond may not cover losses from hacking or electronic fraud. Some bonds include cyber-related provisions, but many do not. The DOL encourages plan sponsors to assess their cyber protections separately and supplement coverage as needed.
- Market losses. Neither product covers investment losses from normal market fluctuations. Fiduciary liability insurance covers claims that a fiduciary chose imprudent investments, but it won’t reimburse the plan simply because a fund lost value.
- Intentional misconduct by fiduciaries. Fiduciary liability policies exclude deliberate fraud and criminal acts. If a fiduciary’s wrongdoing crosses from negligence into intentional dishonesty, the claim shifts to the fidelity bond.
- Settlor functions. Decisions about whether to establish, amend, or terminate a plan are business decisions, not fiduciary acts. Fiduciary liability insurance generally does not cover lawsuits arising from these decisions.
A plan sponsor with a compliant fidelity bond and a solid fiduciary liability policy still benefits from reviewing cybersecurity practices, documenting investment selection processes, and keeping plan documents current.