Bonding Update

Following is a Q&A concerning your fiduciary responsibilities.
Please read this information carefully.

Q. Must plan fiduciaries be bonded if they handle the funds of the Plan?

A. Yes. Plan Fiduciaries who handle or have the authority to handle plan assets must be bonded. A plan fiduciary is considered to be handling funds when the fiduciary's responsibilities risk the loss of funds through fraud or other dishonest means, except in those instances where the risk of loss is negligible.

Q. Can fiduciaries who handle plan assets obtain personal liability coverage for their actions within the Plan?

A. Yes. Fiduciaries, as well as co-fiduciaries, who breach their duties may be personally liable to make a plan whole for losses caused by their breach, including lost opportunity and litigation costs. As a result of a breach of fiduciary responsibility, fiduciaries can be removed and barred from acting in a future fiduciary capacity with respect to any plan.

Q. Can civil penalties be leveled on fiduciaries in breach of their responsibilities?

A. Both the IRS and the Department of Labor can levy civil penalties on fiduciaries. The IRS can assess a 5 percent prohibited transaction excise tax on a fiduciary who participates in a prohibited transaction. The IRS has the authority to increase the excise tax to 100 percent of the amount of the transaction that has not been corrected, if after notice from the IRS that a levy will occur, the prohibited transaction has not been corrected. Additionally, the DOL can levy a civil penalty of 20 percent of the amount recovered with respect to a plan. Please be aware that the DOL is currently targeting Plan Sponsors who do not have a fidelity bond for examination.

Q. May a plan shield a fiduciary in advance of liability?

A. No. There are no provisions that permit a plan to prospectively agree to exempt a particular fiduciary from liability, although fiduciary insurance is obtainable through an errors-and-omissions policy, or through indemnification by the sponsoring employer.

Q. How may fiduciaries insure that they will make prudent fiduciary decisions and adequately document their investment handling?

A. Fiduciaries must exercise procedural due diligence, which is a process for making high-quality, prudent fiduciary decisions and documenting the decisions made in that process. Moreover, a fiduciary's use of procedural due diligence enables the fiduciary to obtain a better defense in the event that the prudent decision results in desultory outcomes.

Q. What things must a fiduciary consider to properly analyze investment alternatives?

A. To obtain the greatest prophylaxis in analyzing investment alternatives for the plan, a fiduciary must:

1. Read all pertinent investment documents and disclosure materials. Ascertain the costs, the risk level, and expected return.
2. Ascertain the reasonableness of any fees associated with the investment.
3. Be able to show that the investment is reasonably designed to further plan purposes and is consistent with the plan's funding policy.
4. Review investment alternatives and obtain competitive bids where that is feasible.
5. Research the investment's historical performance, as well as that of its sponsor, and check any available rating service information that covers the particular investment.
6. Hire an expert to help in the decision-making process.
7. Obtain regular information about the investment's performance, and check out material discrepancies.
8. Document all activity engaged in the investment decision-making process and keep a detailed file of all pertinent documents, including reports, meeting notes, and legal documents.

Q. Are non-publicly traded assets a reasonable investment?

A. Only if the fiduciary's due diligence can be documented as outlined above. Non-publicly traded assets can be considered "non-qualifying plan assets" which may require the Plan to obtain additional bonding.

Q. What is the required fiduciary bond amount?

A. The minimum bond is $1,000.00. The maximum bond is the greater of $500,000.00 or 100% of the non-qualifying assets. A bond must cover at least 10 percent of plan assets unless the Plan contains assets which are considered "non-qualifying assets." If the Plan has non-qualifying assets, the bond must be increased to 100% of the value of those assets unless the Plan receives an annual audit by an independent auditor/accountant.

In order to avoid the additional bonding requirements, fiduciaries need to invest 95% of their assets in qualifying assets such as the following: mutual funds, investment and annuity contracts issued by an insurance company, qualifying employer securities, participant loans, any assets held by a bank or similar financial institution, an insurance company, an organization registered as a broker-dealer or any other organization authorized to act as a trustee for individual retirement accounts and assets in the individual account of a participant over which that participant has the opportunity to exercise control.