Any person who “handles funds or other property of an employee benefit plan” must post a bond under the Employee Retirement Income Security Act (ERISA). ERISA bonds—fidelity bonds—protect plans from loss due to dishonesty or fraud by those who manage the project.
Unlike fiduciary liability insurance, an ERISA bond names the plan as the insured. It provides coverage for theft, robbery, forgery, and misappropriation.
Assets in a plan are secured by fidelity bonds, which act as insurance coverage against fraud or theft. They cover losses such as embezzlement, forgery, misappropriation, wrongful abstraction, and willful misapplication. Fidelity bonds differ from commercial property insurance, which covers property losses from fires, vandalism, or other natural disasters. The ERISA statute requires that any fiduciary or individual handling benefit, retirement, or health plan funds and property must be bonded unless they qualify for one of the exemptions provided in Section 412.
To obtain an ERISA bond, you must apply to a provider listing the name of your benefit, the names of any individuals required to be bonded, and the amount of coverage needed. Then, the provider reviews your application, checks your credit, and issues the bond. ERISA fidelity bonds must be renewed annually. For more information on this requirement, click here. ERISA fidelity bonds are typically priced, with higher coverage amounts costing more.
Administrative Services Bonds
As the name suggests, this type of surety bond protects a company with fiduciary responsibilities for employee benefit plans from financial loss caused by dishonesty or fraud committed by individuals employed in an administrative capacity within that company. ERISA requires this kind of bond for any person who handles retirement plan assets in an organizational capacity, including those who have authority over the investment and management of these assets.
Those bonded under this type of bond are covered from financial loss up to the maximum coverage provided. The minimum coverage available for an ERISA fidelity bond is 10% of the total value of all ERISA plan assets under management.
It is essential to note the difference between ERISA fidelity coverage and fiduciary liability insurance. While the former is legally required, the latter is not. If there is a claim of a breach of fiduciary responsibility, fiduciaries are covered by fiduciary liability insurance, whereas ERISA fidelity bonds cover only the crime.
The Employee Retirement Income Security Act (ERISA) outlines bonding requirements for persons who handle funds or other property of employee benefit plans. These bonds are a form of fiduciary liability insurance and protect the program against fraud, dishonesty, or mismanagement of plan assets by the person covered by the bond. ERISA bonds typically cover losses caused by theft, robbery, forgery, misappropriation, wrongful abstraction, and conversion. While not required, a plan may elect to spend its plan assets to purchase a bond that exceeds the minimum requirement set by ERISA.
The distinction between ERISA fidelity bonds and fiduciary liability insurance must be made even though it happens frequently. Both are forms of insurance that protect a business from damages resulting from acts of dishonesty, but the ERISA fidelity bond is specific to employee benefits and retirement plans. ERISA fidelity bonds are generally obtained through surety companies that the Department of Labor approves.
Investment Company Bonds
Most 401(k) plans and other employee benefit plans in the private sector are subject to the regulations and requirements of the Employee Retirement Income Security Act of 1974, or ERISA. One of those requirements is that people who handle plan funds and property must be bonded.
Bonds shield the plan from losses from fraud or theft by those in charge of those funds. They don’t replace fiduciary liability insurance, which covers fiduciaries for their actions.
ERISA bonds must be purchased through an independent insurance carrier or broker on the Department of Treasury’s listing of approved sureties. The person who needs to be bonded can pay for the bond using plan assets, but it’s not recommended. It’s also essential that the person who buys the glue has no financial stake in either the insurer or the brokerage firm. That could lead to a conflict of interest.