February 20, 2019
Understanding the requirements under Section 412 of ERISA can be complex and daunting for insurance brokers and their clients.
The Department of Labor (DOL) asked the 2018 ERISA Advisory Council to explore future changes in bonding requirement regulations and provide guidance to improve compliance and protect plans from today’s perils, such as cyber risk.
If you'd like to discuss anything you read below, get in touch.
Evolving exposures over the years include plan asset growth, merger and acquisition activity, advancing technologies and growing cyber risks.
The 2014 ERISA Advisory Council recommended future review of employee benefit plans’ ERISA bonds to reduce confusion over coverage issues.
Fidelity bonds have evolved over the years to include both mandated and voluntary insurance coverages.
It is critical for plan sponsors, administrators and service providers to have a strategy for handling plan assets — funds, securities and other property — to minimize exposures to fraud and dishonesty. This is particularly important as fraud techniques become increasingly sophisticated.
To address fraudulent activity involving third parties (third parties are any natural person who does not meet the policy’s definition of “employee,” which can vary by carrier), insurers offer third-party crime coverages to plans, although they are not required to do so by current bonding requirements under ERISA. These coverages are made under the ERISA bond policy by endorsement or the declarations page of the insurance policy.
Everything that follows, up to Segal Select Commentary, is our summary based on the 2018 ERISA Advisory Council Executive Summary to The Secretary of Labor (November 6, 2018) or the Association of Certified Fraud Examiners’ May 2018 Global Study on Occupational Fraud and Abuse.
The Employee Benefit Security Administration (EBSA) asked the ERISA Advisory Council questions about the impact of fraud and dishonesty on five aspects of fidelity insurance:
Organizations lose 5 percent of annual revenue to fraud.
A 2014 EBSA study showed a high percentage of funds have bonding violations.
A 2015 EBSA national investigation with a sample of 1,200 plans with trusts found none of the plans had fidelity insurance policies in place and only 3 percent were actually exempt from bonding requirements.
Failure to have a compliant ERISA fidelity insurance policy is a violation under Section 412.
Non-compliance seems to be greater in the small plan environment. (The size of a “small plan” is not defined.)
The 2018 ERISA Advisory Council recommends that the DOL publish the following new guidance directed to plan officials, plan sponsors and plan service providers:
Plan sponsors may wish to seek guidance on ERISA bonding requirements from ERISA legal counsel and industry experts.
Plan sponsors and administrators should understand what an ERISA fidelity insurance policy does and does not provide and how it coordinates with other types of insurance coverage, so that they can appropriately consider whether to incorporate voluntary coverages into their insurance policy.
ERISA fidelity insurance is readily available and relatively reasonable in cost.
Regulations under ERISA appear to be confusing along with a lack of awareness of the bonding requirements. The lack of updated guidance appears to be a contributing factor to the confusion over what coverage is required.
While we do not know when the DOL will provide an updated Interpretive Bulletin, the ERISA Advisory Council’s general tone is straightforward: Fraud risk is real and growing and securing fidelity insurance cannot be ignored.
The Advisory Council notes that fidelity bonds are readily available and there is no evidence that losses are not being properly protected.
While Segal Select can't predict the future of fraud techniques that may challenge an insurance policy, we can help plan sponsors obtain ERISA fidelity insurance that includes both compliant and voluntary coverages.
For more information, contact us.
If you'd like to print the information above, you can download it as a PDF.
Share this page