The Employee Retirement Income Security Act (“ERISA”) requires that every fiduciary of, and every person who handles funds or other property of, an employee benefit plan, be bonded. This seems like a simple enough proposition. And yet, although the statute imposing the bond requirement has been in place for many years and the Department of Labor has issued guidance to clarify the requirement, we continue to field questions regarding its scope and meaning. When is a person considered to be “handling funds or other property” of a plan, and therefore required to be bonded? Who is responsible for obtaining the bond? What acts is the bond required to cover?
A thorough discussion of all of these questions is beyond the scope of this newsletter. However, it’s difficult to overstate the importance of the bonding requirement, so this is as good a place as any to begin to address the subject.
Who Must Be Bonded?
As mentioned above, the statute requires every fiduciary and every person who handles funds or other property to be bonded. (Exceptions include banks, insurance companies and broker dealers.) This triggers two questions—who is a “fiduciary,” and what does it mean to be “handling” funds of a plan? The first question—who is a fiduciary—is not as easy to answer as it might first appear. Some persons are fiduciaries by virtue of their relationship to a plan. For example, a plan trustee is always a fiduciary. Other persons, however, become fiduciaries not because of any title they hold but as a result of the functions they perform. Generally speaking, persons who have discretionary authority or discretionary responsibility in the administration of a plan, or exercise discretionary authority or discretionary control over the management of the plan (or any authority or control, discretionary or not, over the plan assets) are plan fiduciaries, as are persons who provide investment advice to a plan.
The second question—who is “handling plan assets”—is also not susceptible to an easy answer. The DOL recently stated that if a person’s duties and functions involve receipt, safekeeping and disbursement of plan funds, access to plan funds, or the ability to make decisions that might cause a loss to the plan due to fraud or dishonesty, the person should be considered to be handling plan funds, and therefore subject to the bonding requirement.
Who is Responsible for Making Sure That All Persons Required to be Bonded Are Bonded?
ERISA §412—the statute that imposes the bonding requirement—states that it is unlawful for any “plan official” to permit any other plan official to receive, handle, disburse or otherwise exercise custody or control over plan funds or other property without first being properly bonded. In other words, persons who are required to be bonded are obligated to ensure that every other person that is required to be bonded is actually covered by a bond. For example, if a plan service provider is handling plan funds, the plan’s trustee is obligated to make sure that the service provider is bonded. But the rule also works in reverse. That is, it is unlawful for a service provider to permit the trustee to perform the functions of trustee without being covered by a bond.
As a practical matter, the persons who are responsible for administering the plan—such as the plan committee, plan administrator and trustees—should identify all of the persons who may be “handling plan assets” within the meaning of the applicable regulations and should take steps to make sure they are covered by the terms of a bond.
If I Have Obtained a Bond, Does It Automatically Cover Everyone It Needs to Cover?
Maybe, maybe not. Different bond forms have different provisions, and the law does not require every bond form to cover every person that ERISA requires to be bonded. Plan fiduciaries should take the time to review their bond forms, ask questions about who is covered by the form and secure additional bonding (or require their service providers to secure an appropriate bond) if the bond in place covers fewer than all of the persons that are required to be bonded.