How does bonding work and why do I need it?

The reason bonding is required is because the Department of Labor requires an annual audit for plans with fewer than 100 employees. However, the annual audit requirement is waived under the following circumstances:

• Less than 5% of the plan’s net assets are from “non-qualifying assets” or
• The retirement plan has a fidelity bond that covers 100% of the value of all plan non-qualifying assets.

Because most plans have qualifying assets like stocks, bonds, and mutual funds, there is no audit or bonding requirement. But if there are non-qualifying assets and no audit is performed, then the plan must have bonding. But bonding is not as bad as you might think. It usually costs a few hundred dollars a year and there are large discounts for buying multiple years up front.