ERISA Fidelity Bond:  Are RIAs Required to Obtain?

By Brian Francetich
Fielding this question seemingly each week in our office, there appears to be adequate confusion out there to motivate attention as this month’s Investment Advisor ia360 RiskTip.

Some would say the word confusion is an appropriate adjective when defining many mandates found from within the halls of the US Department of Labor. In order to ascertain if your RIA firm is required to purchase a fidelity bond for client ERISA accounts we must walk through a few tests to make the determination.

Who is required to have a Client ERISA Fidelity Bond? Pursuant to ERISA section 412 and 29 C.F.R. § 2580.412-6, any investment advisor/fiduciary who “handles” ERISA funds must be bonded as well as advisors that have access or decision making authority over ERISA plan assets (unless under specific exemption which applies primarily to certain banks, insurance companies and registered broker dealers). Side note: ERISA section 412 and 29 C.F.R. § 2580.412-6 also includes any non-investment advisor fiduciary or plan sponsor and, therefore, applies to your own non-client company ERISA plan that the firm may provide to its employees.

What does “handle” mean – the key word? Naturally this includes physically handling monies, disbursement authority and check signing authority – services that very few advisors provide. However, the wrinkle here, though, is the word “handling” which, per the Department of Labor, includes “Supervisory or decision-making responsibility over activities that require bonding”. As you may notice, this sentence is highly confusing. What are the “…activities that require bonding”?! Yet, reading below in the next paragraph, it is evident the department is ambiguously targeting those firms possessing discretionary authority in the management of plan assets. Are we surprised?

What are the “…activities that require bonding”? And, does solely providing investment advice require bonding? The DOL is quite clear (at least on this): “A person who provides investment advice, but who does not exercise or have the right to exercise discretionary authority with respect to purchasing or selling securities or other property for the plan, is not required to be bonded solely by reason of providing such investment advice.” Therefore, whether or not one has discretionary authority is the determinant. An advisor with discretion over ERISA plan assets must maintain proper bonding per the Department of Labor.

Now that we have established that, who does this bond protect and what is its purpose? The bond provides fidelity (crime) protection to ERISA plan participants from theft of plan assets by a fiduciary. Both the plan sponsor as well as any fiduciary which handles funds must purchase a bond in the amount of 10% of plan assets with either a $500,000 or $1,000,000 cap depending on the types of assets within the plan.

It is our hope that you found this RiskTip informative. Please do not hesitate contacting should you need assistance in this matter or have further questions.

**Information primarily obtained from DOL website ERISA Q&A: http://www.dol.gov/ebsa/regs/fab2008-4.html

Golsan Scruggs is an insurance brokerage firm operating throughout the United States specializing in investment advisor E&O errors & omissions insurance (aka professional liability insurance) for RIA registered investment advisors.. As one of the largest insurers of RIA firms in the U.S., we have a dedicated staff that understands the risks of the financial services industry and delivers superior results.  We make the underwriting process painless.