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.
ERISA section 412 requires a bond for every plan official, which the statute defines as any fiduciary of the plan and any other person who handles funds or other property of the plan.
Notice what is not in that sentence. There is no list of job titles. Being a trustee does not automatically put you in, and not being a trustee does not keep you out. The whole question turns on handling, and handling is defined by regulation in a way that is broader than the everyday meaning of the word.
The six ways to be handling plan funds#
29 CFR 2580.412-6 sets out when a person is handling. Any one of these is enough:
- Physical contact with cash, checks or similar property.
- Power to transfer plan funds or property to oneself or to a third party.
- Power to negotiate plan property, for example the authority to endorse or cash a check.
- Disbursement authority, or the power to direct disbursement.
- Authority to sign checks or other negotiable instruments.
- Supervisory or decision-making responsibility over anyone doing the above.
That last one is the one sponsors forget. A CFO who never touches a plan check but who supervises the person who does is handling.
The people who are usually in#
Plan trustees. The plan administrator, and where the administrator is an entity rather than a person, the individuals at that entity who perform the handling functions. Officers and employees of the sponsor who process contributions, approve distributions, or sign on the plan account. The owner, in almost every small plan, because in a small plan the owner is the one with the authority.
Investment committee members are a judgment call. Sitting on a committee that selects funds is not by itself handling, because selecting an investment is not disbursing money. Having authority to move assets between accounts is. Most committee charters end up on the handling side, and the cost of covering them is nil, so covering them is the sensible default.
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Service providers#
A third party administrator, recordkeeper, custodian or payroll provider needs bonding only if it handles plan funds, and the same six-part test applies to it.
Advice alone does not trigger it. The DOL has been clear that a person who renders investment advice without any discretionary authority or control over the purchase, sale or disbursement of plan assets is not handling, and needs no bond for that role.
In practice most institutional providers carry their own bonds and will confirm it in writing. Ask. It is a one line email and it closes the question for the audit file. What you should not do is assume that because the recordkeeper is a large and famous company, the plan’s own bond is somehow unnecessary. The sponsor’s people still handle funds, and the sponsor’s bond is still required.
One bond, many people#
You do not buy a bond per person. The normal structure is a single bond that covers everyone who handles funds, either by naming them on a schedule or, far more commonly, by a blanket form that covers a class such as "all employees of the sponsor" or "all trustees, officers and employees."
The blanket form is better for the obvious reason: a scheduled form goes stale the moment somebody is hired or leaves, and nobody remembers to update it. If the plan has any staff turnover at all, and every plan does, insist on a blanket form.
The one thing you are not allowed to do#
29 U.S.C. 1112(c) makes it unlawful to obtain the bond from a surety, or through an agent or broker, in whose business the plan or any party in interest has control or a significant financial interest, directly or indirectly.
Read literally that is aimed at self-dealing: you may not route the plan’s bond through your own agency or through a company you control. It rarely comes up, and when it does it is usually an accident rather than a scheme, because a business owner with an insurance agency naturally places their own coverage through it. If that describes you, place the plan’s bond somewhere else.
Common questions
Does the plan administrator need to be bonded?
If the plan administrator handles funds or property, yes. Where a company rather than an individual is named as administrator, the DOL looks through to the natural persons at that company who actually perform the handling functions, and it is those people who must be covered.
Does a payroll company that remits our 401(k) deferrals need a bond?
It is handling plan funds while those deferrals are in its hands, so bonding is required for that role. Most established payroll providers carry a bond and will confirm the coverage on request. Get the confirmation in writing and keep it with the plan records.
Our financial advisor recommends the fund lineup. Do they need to be bonded?
Not for that role alone. Rendering investment advice without discretionary authority or control over the purchase, sale or disbursement of plan assets is not handling. If the same advisor also has authority to move money, that authority is handling and bonding follows it.
Can the bond just name the company instead of listing people?
Yes, and that is usually the better answer. A blanket form covering a described class, such as all officers and employees of the sponsor, covers new hires automatically and does not go stale when somebody leaves. A scheduled list of names has to be maintained, and in practice it never is.
I am the only person involved with the plan. Do I still need a bond?
If the plan is covered by Title I of ERISA, yes. Being the only handler does not create an exemption, it just means the bond covers one person. The exemption that people are usually reaching for is the one for owner-only plans, which is about who participates in the plan rather than about who administers it.
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