The Retrodate ERISA Fidelity Bond: Unraveling ERISA’s Hidden Risk
The Employee Retirement Income Security Act (ERISA) was introduced in 1974, a federal law that protects employees and beneficiaries that participate in private sector retirement and health plans. ERISA is enforced by the Department of Labor, the Department of the Treasury and the Pension Benefit Guaranty Corporation. Among the requirements of the law is found, a fidelity bond obligation. An ERISA fidelity bond protects plan assets specifically from the dishonest acts of trustees and fiduciaries that “handle plan funds”. The bond is not discretionary.
While exact figures are not readily available, there is evidence of broad non-compliance with the bonding requirements. This non-compliance contemplates both failure to maintain an ERISA bond and failure to ensure adequate bond coverage limits. Many plan administrators, particularly those of smaller sponsors are simply unaware of the bonding requirement. Administrators misinterpret the statute, being affected by confusion regarding who is considered a “plan official” and therefore subject to bonding. Administrative oversight can also lead to a compliance failure. Maintaining accurate records of fund handling and ensuring the bond amount is adequate requires ongoing administrative effort, easily overlooked by small firms. Errors or omissions create the preceding however some small plan sponsors might simply seek to avoid the cost, which is a flagrant violation.
A plan without ERISA bond protection must come into compliance immediately upon discovery. For plan sponsors that may discover that the bond requirement has not been met, detection may occur months or years after plan inception leaving the plan bare for a significant period of time. Sureties generally issue ERISA fidelity bonds freely and very inexpensively. The simplicity and inconsequential cost are reflective of the success of the ERISA bond class of business. Sureties generally do NOT retrodate ERISA fidelity bond coverages, so a large uninsured gap creates a particular conundrum for surety companies. The reluctance of insurers to backdate ERISA fidelity bond coverage stems primarily from the increased risk they assume when doing so.
Unknown Prior Risk – When a surety backdates an ERISA bond, it accepts liability for events that may have already occurred. The opportunity to properly assess the risk of dishonest acts that might have transpired during the backdated period is effectively curtailed. Without prior underwriting, a surety can experience difficulty in acquiring a clear picture of the plan’s past management, financial practices, or potential vulnerabilities.
Alignment of Risk with Premium – Insurance premiums are calculated based on the assessed risk. Backdating coverage is a disruptor, making this calculation more difficult. Essentially a surety assumes a risk without having collected the appropriate premiums for that period and more importantly for a broader book of similar “retro” policies for which loss/adjustment/premium experience is limited. The value of the premium that the surety collects, generally on a three or more-year prepaid basis, is also impacted. The insurer losses the investment value of the premium for the backdated period.
The Fraud Risk – Backdating ERISA bonds creates an enhanced opportunity for fraudulent claims. Applicant plan sponsors that are aware of past acts that might fall under the definition of dishonesty under the bond could exploit the retrodated ERISA fidelity bond coverage.
A retrodated ERISA fidelity bond exposes the insurer to significant unknown liabilities, making it a practice they generally avoid. Placing them is a challenge but surety underwriters that are willing to “pull out the stops” for deserving clients, can offer retro and do so with countermeasures that reduce the risk to sureties. Specific strategies, documentary requirements and risk mitigation methodologies are beyond the scope of this informational, more specifically they are proprietary and part of undewriters’s “secret sauce”. That being said, here’s the plug, . . .
Surety One, Inc. distinguishes itself by offering a specialized program that facilitates the issuance of retrodated ERISA fidelity bonds. This is a notable exception in the surety industry, where backdating such bonds is broadly avoided. Through its specialty non-standard program, Surety One, Inc. provides a solution for those plan sponsors who may find themselves needing to rectify past gaps in their ERISA bond coverage. If you are an ERISA plan fiduciary or sponsor in need of a retro-dated bond, or if you have any questions regarding ERISA fidelity bond requirements, reach out to Surety One, Inc. to explore your options.
~ C. Constantin Poindexter, CPCU, JD, MA, ASLI, ARe, AFSB
