What Small Business Owners Need to Know About 401(k) Fidelity Bonds

Required for most 401(k) plans: Under the Employee Retirement Income Security Act (ERISA), anyone who handles plan funds or property must be covered by a fidelity bond.

The bond protects the plan, not the employer: A fidelity bond reimburses the retirement plan if fraud, theft, or embezzlement occurs. It’s different from fiduciary liability insurance, which is optional.

Minimum coverage rules apply: Bond amounts are based on plan assets, with a required minimum—meaning insufficient coverage can create compliance risk.

Many small business owners are surprised to learn that starting a 401(k) plan may require a bond to protect the plan and stay compliant with federal law. Understanding whether a fidelity bond is required (and what’s at risk if you don’t have one) is an important early step for new plan sponsors.

What is a 401(k) fidelity bond?

A fidelity bond, or ERISA bond, is an insurance policy that provides a 401(k) plan with protection from losses caused by any fraudulent behavior such as embezzlement, theft, larceny, or misappropriation by those who have access to the plan’s funds. The fidelity bond will counteract any losses due to fraudulent activity.

A fidelity bond is different from fiduciary liability insurance, sometimes referred to as a fiduciary bond. Fiduciary liability insurance insures plan officials (and sometimes the plan) against losses caused by breaches of fiduciary responsibility. However, fiduciary liability insurance is optional, while a fidelity or ERISA bond is required at the start of a 401(k) plan.

This is a common point of confusion for new plan sponsors, especially because fidelity bonds are often mistaken for fiduciary liability insurance, even though the two serve very different purposes.

Does my 401(k) plan require an ERISA fidelity bond?

A fidelity bond is required as soon as you start your 401(k) plan. ERISA requires every person who handles funds or other property for an employee benefit plan, including 401(k) plans, to be bonded. For most small businesses, that means coverage must be in place before the plan begins accepting contributions.

How much fidelity bond coverage is required?

At the beginning of each plan year, the coverage amount of the bond must be at least 10% of the amount of funds handled. The minimum bond amount is $1,000 and, in most cases, is not required to be more than $500,000. However, the plan can purchase a bond for a higher coverage amount, if appropriate.

For new plans, a fidelity bond should be in place by the time the plan is set up. Estimated plan contributions are used to determine the exact bond amount, but employers can plan on it being at least $1,000 in coverage.

Having a bond that’s too small can still put your plan out of compliance, which may lead to additional scrutiny during Department of Labor reviews.

Where do I get a fidelity bond for my 401(k) plan?

Fidelity bonds are obtained through a surety or reinsurer that is named on the Department of Treasury’s (DOT) Listing of Approved Sureties.

What happens to a plan with no fidelity bond?

Failing to obtain or maintain the required fidelity bond can create compliance issues for plan sponsors and increase the risk of enforcement action, especially during regulatory reviews.

You’re required to report that you have a fidelity bond on your annual Form 5500 filing. The Department of Labor (DOL) regularly monitors plans that report no fidelity bond coverage—and if you do not have a bond, or the bond you have does not have sufficient coverage for the plan’s assets, you are at risk for triggering a DOL audit. Failure to have a bond is a fiduciary breach, resulting in plan fiduciaries being personally liable for any losses due to fraud or dishonest practices that would have been covered by the fidelity bond.

What you need to know about fidelity bonds | Download PDF

Sponsoring a retirement plan is a great step towards retirement readiness for you and your employees. While there are quite a few things to check off the list as you get your plan set up, it’s important to make sure you’ve got the bases covered. Make sure to read any resources your 401(k) plan administrator sends to guide you through setup.

Ready to get started?

Ensuring your 401(k) has the appropriate fidelity bond isn’t just a formality; it’s a core ERISA requirement designed to protect plan assets and reduce fiduciary risk for employers.

To learn more about starting a 401(k) or similar retirement plan for your business, contact our retirement specialists at 800-345-6363.