ERISA Advisory Council Suggests Updated Guidance on ERISA Bonding

The Advisory Council on Employee Welfare and Pension Benefit Plans has recommended that the Department of Labor (DOL) issue new guidance on ERISA bonding, as well as a summary of the requirements for securing a fidelity bond that complies with DOL guidance.

The recommendations are contained in “Evaluating the Department’s Regulations and Guidance on ERISA Bonding Requirements and Exploring Reform Considerations,” the Advisory Council report to Secretary of Labor Alexander Acosta, which has been released in its entirety.

Last year, the ERISA Advisory Council examined the effectiveness of the DOL’s regulations and sub-regulatory guidance under Section 412 of ERISA, which requires (with certain exceptions) that an employee benefit plan purchase a fidelity bond to protect against losses to plan funds or other property caused by acts of fraud or dishonesty. The Council was especially interested in whether changes to those regulations and sub-regulatory guidance could improve compliance and thereby enhance the safeguarding of plan funds or other property from fraud and dishonesty.

After discussion with the DOL to learn of specific examples of noncompliance with the fidelity bond requirements, the Council broke down its evaluation into five somewhat overlapping inquiries:

1. To what extent are the fidelity bonds currently being secured by plan officials insuring against losses resulting from any act of fraud or dishonesty as Section 412 of ERISA currently requires?
2. To what extent are the fidelity bonds currently being secured by plan officials covering all plan officials who handle plan funds or other property Section 412 requires?
3. To what extent are the fidelity bonds currently being secured by plan officials providing sufficient recovery amounts to offset the full losses caused by fraud or dishonesty?
4. Should the plan funds or other property mandated to be insured under Section 412 against losses attributable to fraud or dishonesty be expanded to include participant contributions before their deposit in the plan?
5. Should the DOL’s current guidance and reporting requirements be modified to clarify and to better educate plan officials regarding the value of, and the distinctions among:

• fidelity bonds;
• insurance policies covering crime (including cyber crime);
• insurance policies covering liability; and
• insurance policies indemnifying fiduciaries?

The Findings

While it did not find evidence of uninsured fidelity losses resulting from insurance market failures or out-of-date statutory or regulatory requirements, the Council did observe evidence of greater noncompliance — that is, the failure of plans to be covered by fidelity bonds — than it says should have been observed, given the price and availability of fidelity bonds. The Council observed that the instances of noncompliance are concentrated in the small plan market; it attributes this to a general underdeveloped awareness and misunderstanding of the fidelity bond rules by sponsors of small plans and the commercial service providers who serve the small plan market.

The Recommendations

Based upon testimony received during public hearings, as well as submission of written material from the DOL and interested stakeholders, the Council developed recommendations for updating regulatory and sub-regulatory guidance for plan officials, plan sponsors and plan service providers to improve compliance with the requirements of section 412.

Specifically, the Council recommends that the DOL publish the following new guidance directed to plan officials, plan sponsors, and plan service providers:

1. A new Interpretive Bulletin, incorporating much of the content of Field Assistance Bulletin 2008-04.
2. A summary of the requirements for securing a fidelity bond that complies with DOL guidance. The Council says that such a summary would demystify fidelity bonds for purchasers, by:

• explaining the basic requirements; and
• helping them to distinguish among the various insurance products that are typically sold in conjunction with fidelity bonds, but that are not subject to statutory mandates under ERISA or the DOL’s rules and regulations.

In updating FAB 2008-14, the Council recommends that the DOL focus this time directly on plan sponsors and other plan officials and plan service providers as the targeted audience. The Council suggests that the best vehicle for this new publication would be an Interpretive Bulletin, because it would be published in the Code of Federal Regulations and not require a full Administrative Procedure Act process that a revision of the current Temporary Regulations would entail.

But Don’t Do This

The Council says that it is not recommending that Section 412 or the Temporary Regulations be updated to increase the mandated amount of the fidelity bond because instances of losses due to fraud or dishonesty that exceed the existing required coverage amounts “simply are not being reported in any material numbers.”
 
The Council also is not recommending that Section 412 be amended or interpreted at this time to include the coverage of losses due to the fraudulent or dishonest failure of employers to deposit participant contributions to employee benefit plans on a timely basis. The Council’s reluctance to make such a recommendation is based on its uncertainty regarding whether such losses could be insured efficiently by the surety industry and whether the surety benefit provided to participants and beneficiaries would justify the cost of the expanded coverage requirement. The Council concludes that if the DOL wishes to explore this question further, it would need financial testing performed by insurance experts to evaluate the costs and benefits of the expanded mandate.