Phil Pavarini is a licensed insurance producer and is compensated when a bond is placed through this site. This page is general information, not legal, tax or fiduciary advice, and it is not a substitute for reading your plan document or contract or for advice from your own counsel. Figures shown are current as of the date on this page.
A 401(k) with any non-owner employee in it is covered by Title I of ERISA, which means section 412 applies and a fidelity bond is required. That is true of a plan with four participants and $80,000 in it, and it is true from the first plan year.
What makes the 401(k) version worth its own page is that the day to day mechanics obscure the requirement. Participants direct their own investments. A large recordkeeper holds the assets. Payroll sends the deferrals. It looks, from the sponsor’s chair, as though nobody at the company touches the money. That impression is wrong, and it is the reason a surprising number of 401(k) plans are underbonded or unbonded.
Who at the company is handling funds#
Run the six-part handling test from the handling page against a normal small 401(k) and the answer is usually four or five people:
- Whoever authorizes the payroll file that sends deferrals to the recordkeeper.
- Whoever can approve a distribution or a loan on the recordkeeper’s sponsor portal. That is disbursement authority, which is handling, even though the money never passes through the company.
- Whoever holds signature authority on the plan’s account or on the forfeiture account.
- The trustee, which in most small plans is the owner.
- Whoever supervises any of the above.
In a twelve-person company, that is frequently the owner, the office manager and the outside bookkeeper. A blanket bond covering all officers and employees of the sponsor picks up all of them and does not need editing when the office manager leaves.
Calculating it for a 401(k)#
Take the highest amount of plan funds handled during the preceding plan year and take 10 percent. For a bundled 401(k) that means the plan’s total assets at their peak last year, and it is entirely reasonable to use the highest month-end balance from the recordkeeper’s reporting rather than trying to reconstruct a daily high.
Add contributions in transit if they are material. For most plans they are not, and the rounding up you should be doing anyway covers them.
Worked: a plan that peaked at $1,340,000 last year needs at least $134,000 of bond this year. Buy $150,000. The difference in premium is trivial and it buys you a year or two of growth before the number needs revisiting.
The cap is $500,000, so a plan over $5,000,000 stops recalculating. If the plan holds a company stock fund, the cap is $1,000,000 and you keep calculating to $10,000,000.
Know the amount you need? Apply for this bond, or read the full bond details.
What your recordkeeper is and is not doing for you#
Large recordkeepers carry their own fidelity bonds, and they should, because they handle plan funds. That bond covers their people. It does nothing about the sponsor’s people, and no recordkeeper claims otherwise.
Some bundled providers will sell you an ERISA bond alongside the plan, or point you at a carrier. That is a convenience rather than a compliance answer, and it is worth checking two things on whatever they arrange: that the plan is named on it, and that the amount still matches after a few years of growth. Bonds sold at plan inception have a habit of staying at the original amount forever, because nobody owns the renewal.
Ask the recordkeeper for evidence of their own bond once and file it. Then treat the plan’s bond as your own problem, because it is.
The annual check that takes four minutes#
Once a year, at the start of the plan year, do this:
- Pull the highest plan balance from last year.
- Multiply by 0.10.
- Compare to the bond amount on the current bond.
- If the bond is lower, raise it. If it is higher, do nothing.
- Confirm the plan is still correctly named on the bond, and that the bond has not lapsed.
Put it on the same calendar entry as whatever else you do at the start of the plan year. The entire failure mode for this requirement is that nobody owns step 1, so it never happens and the bond sits at its original amount while the plan quadruples.
Auto-enrollment, pooled plans and a growing headcount#
Three things push a 401(k)’s required bond up faster than sponsors expect.
Automatic enrollment raises participation sharply in the first two years, and the bond calculation lags it by a year. A plan that adds auto-enrollment should expect the required amount to jump at the following plan year.
Pooled employer plans. A PEP sits under the $1,000,000 ceiling rather than the $500,000 one, which matters at the pooled plan level rather than to an individual adopting employer.
Headcount growth. Crossing 100 participants brings the audit requirement, and an auditor is the party most likely to notice a stale bond. If you are approaching that line, fix the bond before the first audit rather than as a finding in it.
Common questions
Does a 401(k) plan need a fidelity bond even if the recordkeeper holds all the assets?
Yes. The recordkeeper’s own bond covers the recordkeeper’s people. The requirement attaches to everyone who handles plan funds, and at almost every sponsor that includes whoever authorizes the payroll deferral file and whoever can approve distributions on the sponsor portal.
How much fidelity bond does a 401(k) with $2 million need?
At least $200,000, assuming $2 million was the highest amount of funds handled during the preceding plan year and the plan holds no employer securities. Buying somewhat above the calculated figure is normal practice and costs very little.
Is the fidelity bond the same as the 401(k) audit requirement?
No, they are separate. The bond is required by ERISA section 412 for essentially all covered plans regardless of size. The independent audit is generally required once the plan has 100 or more participants, subject to the small plan waiver. The two interact in one place: the small plan audit waiver has its own bonding condition if the plan holds non-qualifying assets.
We just started our 401(k). When do we need the bond?
Before funds are handled, which in practice means before the first deferral is remitted. With no preceding plan year to measure, use a reasonable good faith estimate of the funds that will be handled in the first year and bond to at least 10 percent of that, subject to the $1,000 floor.
Who pays for the 401(k) fidelity bond?
It can be paid by the plan sponsor or, because the bond is a required plan expense that protects the plan, from plan assets. Many sponsors pay it from company funds simply because the amount is small and it avoids a conversation about plan expenses. Either is defensible.
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