What is a fidelity bond for a 401k?

A fidelity bond is a form of insurance that provides protection against losses caused by fraudulent or dishonest acts. In the context of a 401k plan, a fidelity bond ensures that plan participants are protected if any of the plan’s fiduciaries – such as a plan administrator or trustee – steal or embezzle funds from the plan. This bond is a crucial component of a 401k plan and provides an extra layer of security for employees’ retirement savings.

FAQs:

1. Why is a fidelity bond important for a 401k plan?

A fidelity bond is important for a 401k plan as it helps safeguard the plan’s assets against potential losses resulting from fraudulent activities.

2. Who typically purchases the fidelity bond for a 401k plan?

The employer or the plan sponsor is responsible for purchasing the fidelity bond for the 401k plan.

3. Are all 401k plans required to have a fidelity bond?

Yes, according to the Employee Retirement Income Security Act (ERISA), all 401k plans must have a fidelity bond in place.

4. How much coverage does a fidelity bond provide?

The amount of coverage required for a fidelity bond is generally at least 10% of the plan’s assets, with a minimum coverage of $1,000 and a maximum of $500,000.

5. What types of losses does a fidelity bond cover?

A fidelity bond covers losses resulting from fraud, theft, embezzlement, or other dishonest acts committed by plan fiduciaries or employees.

6. Do fidelity bonds cover losses due to market fluctuation?

No, fidelity bonds do not cover losses resulting from market fluctuations or investment performance. They only provide protection against fraudulent activities.

7. Can a fidelity bond be canceled?

Yes, a fidelity bond can be canceled, but the plan sponsor must replace it with a new bond before canceling the existing one.

8. Can employers purchase additional coverage beyond the minimum requirement?

Yes, employers have the option to purchase additional coverage beyond the minimum required, depending on the size and complexity of the 401k plan.

9. What happens if a fiduciary commits a fraudulent act and there is no fidelity bond?

If a fiduciary commits fraud and there is no fidelity bond in place, the plan participants may face difficulties recovering their losses. It is essential to have a fidelity bond to mitigate such risks.

10. Are fidelity bonds the same as fiduciary liability insurance?

No, fidelity bonds and fiduciary liability insurance are different. Fidelity bonds protect against fraudulent acts, while fiduciary liability insurance provides coverage for breaches of fiduciary duty.

11. Do fidelity bonds protect against errors or negligence?

No, fidelity bonds specifically cover losses resulting from fraudulent or dishonest acts. Errors or negligence are usually covered by professional liability insurance.

12. Can plan participants file a claim directly with the bonding company?

No, plan participants cannot file a claim directly with the bonding company. Claims are typically handled by the plan sponsor or the employer who purchased the fidelity bond.

In conclusion, a fidelity bond for a 401k plan is a necessary safeguard to protect plan participants from potential losses caused by fraudulent or dishonest acts committed by plan fiduciaries. It is required by law and provides an added level of security, ensuring the integrity of employees’ retirement savings.

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