Pension Bonding vs. Fiduciary Liability Insurance

| April 9, 2013

A pension bond is a type of surety bond that protects the assets of an employee pension plan from embezzlement, mismanagement or other action by the plan manager that causes financial loss to the pension. Fiduciary liability protects the personal and corporate assets of the plan manager in the event of wrongful acts or breach of contract claim.

Pension Plan Managers

When an employer offers benefits to its employees in the form of a pension or retirement plan, the employer must hire or appoint someone to manage the plan. The plan manager operates in fiduciary role. It is the fiduciary’s responsibility to manage the plan keeping the welfare of the employees in mind. To ensure the proper handling of the pension funds, the fiduciary is bonded under a pension bond.

Pension Bond

A pension bond is also known as an ERISA bond. The Employee Retirement Income Retirement Securities Act of 1974 mandates that any employer offering a pension or benefits plan must secure a bond for the manager/fiduciary of the plan. The pension bond is a type of guarantee that a fund manager will prudently perform his duties. A pension bond reimburses the pension plan for loss sustained as a result of mismanagement, theft or fraud perpetrated by the plan manager. Pension bonds solely protect the assets of the pension plan.

Fiduciary Liability

In the role of pension plan manager, the manager is held legally responsible for breach of fiduciary responsibility or wrongful acts while administering or managing the plan. With the passage of ERISA in 1974, plan managers who commit a wrongful act or breach of contract are held corporately and personally responsible for their actions. In other words, a breach of fiduciary responsibility exposes the plan manager to both corporate and personal lawsuits. By purchasing a fiduciary liability policy, the business and personal assets of the manager are protected. The insurance company responds to such lawsuits and pays the claim accordingly. Fiduciary liability policies protect the plan managers.Surety Bonds

Pension Insurance Requirements

Pension bonds are a federal requirement. All employers offering a pension or retirement plan must secure a bond covering the asset managers. Fiduciary liability, on the other hand, is not federally mandated. A company can provide employee pension plans with out securing a fiduciary liability policy, but purchasing a fiduciary liability policy is recommended.

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Category: Fiduciary, Insurance, Liability

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Felicia A. Williams is a wife, mother, freelance writer and owner of Tidbits About Money.

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