Do 403(b) Plans Need a Fidelity Bond?

Fidelity bonds protect individuals with retirement plans from fraud and theft losses caused by the persons who manage their retirement fund. The Employee Retirement Income Security Act (ERISA) requires most retirement plan managers to purchase fidelity bonds, but some exceptions apply to 403(b) plans, which non-profits use in order to provide retirement savings for their employees, according to the U.S. Department of Labor.


Since ERISA requires almost all 403(b) plan managers and their employees who have access to plan funds to carry a bond, plan participants have a smaller risk of losing their retirement savings due to the actions of an unscrupulous fund manager. The bond issuer will compensate the fund up to the value of the bond for any losses related to fraud and dishonesty without any amount removed as a deductible.


If an employer backs a 403(b) fund with its own general assets, the fund managers need not obtain a fidelity bond, because any losses due to theft or fraud will be covered by the assets of the business. To qualify for this exemption, non-profits cannot segregate their funds into a separate account or hire third party insurers to pay annuity benefits. 403(b) programs in which employees predominately manage investments by themselves without employer contributions do not fall under fidelity bond requirements outlined in ERISA Title I.


Plan managers who handle the retirement funds of less than 100 employees should purchase a fidelity bond, because they can avoid audit requirements established in the Chapter 29, Section 2520.104-46 of the Code of Federal Regulations, according to the American Institute of CPAs. If 403(b) plan managers do not carry required fidelity bonds, ERISA contains no specified civil or criminal penalty for them failing to do so, but the U.S. Department of Labor can sue them in order to enforce bonding rules.


Persons who manage the 403(b) plan and their employees must carry a fidelity bond equal to 10 percent of the market value of the assets that they manage, with a minimum requirement of a $1,000 bond and a maximum requirement of $500,000 in surety, per Section 412 of the ERISA. This limit increases to $1 million if a plan manager invests in the business that sponsored the 403(b) plan. Plan managers will have to purchase a fidelity bond greater than 10 percent of the investment pool they manage if they invest more than 5 percent of the fund in companies not legally registered in the United States.