Employee benefits are at the center of many American workers and their future. However, there have been public concerns about mismanagement and abuse of the plans’ funds, leaving employees vulnerable to losing their hard-earned benefits.
As an employer or if you’re involved in overseeing employee plans, you’ve to be accountable for your decisions and conduct. The ERISA bond is one of the key tools to protect plan participants from losses arising from fraud or dishonesty.
But what exactly does an ERISA bond cover?
This article breaks down the essentials of ERISA bond coverage, clarifies common misconceptions, and outlines the compliance requirements for ERISA bonds.
Let’s get started.
TL;DR - ERISA Bond Coverage vs. Exclusion
An ERISA bond safeguards employee benefit plans against losses arising from a fiduciary’s misconduct.
The table below outlines some of the actions covered by the bond:
| Covered by an ERISA Bond | Not Covered by an ERISA Bond |
|---|---|
| Larceny and theft ✔️ | General mismanagement ❌ |
| Embezzlement and misappropriation✔️ | Poor investment decisions❌ |
| Forgery and willful misapplication✔️ | Market downturns❌ |
| Wrongful conversion and wrongful abstraction✔️ |
Continue reading to get an in-depth discussion of ERISA bonds and why they are essential for your employee benefits plan.
What is an ERISA Bond?
The Employee Retirement Income Security Act of 1974 (ERISA) was brought to protect the retirement assets of American workers.
Over the years, the scope of protection provided by ERISA has increased dramatically.
- An ERISA bond, therefore, is designed to protect the assets of employee benefit plans against losses caused by fraudulent or dishonest acts, such as fraud or theft committed by individuals who handle the plan’s funds.
- As such, the Act requires all fiduciaries, plan administrators, and employers who handle employee benefit plans to fulfill their fiduciary duty and protect the hard-earned benefits of employees.
ERISA Bonds vs. Other Insurance Types
Most insurance policies offer protection to the party that buys the policy. However, ERISA differs in that it protects the beneficiaries of employee benefit plans, that is, your employees.
ERISA bonds also stand out from other insurance types because they are required by federal law. Its purpose is solely to replace lost funds in an employee plan.
Here are examples of other insurance types:
- General Liability Insurance: This option offers coverage for third-party claims concerning bodily injury or property damage
- Professional Liability Insurance: It offers protection against claims of negligence or mistakes committed by professional service providers.
ERISA Bond vs. Fidelity Bond
People often use the terms “ERISA bond” and “fidelity bond” interchangeably. However, they have different meanings.
Here are the distinctions:
- Fidelity Bond: It is a broad, general insurance policy that protects business owners against employee misconduct, such as forgery and embezzlement.
- ERISA Bond: A specific type of fidelity bond required by the federal government that covers fiduciaries entrusted with the management of employee benefit plans.
All ERISA bonds are fidelity bonds, but not all fidelity bonds meet the mandated requirements of being ERISA bonds.
Fiduciary Liability vs. ERISA Bond
Fiduciary liability insurance and ERISA bonds may seem similar. However, they provide distinct forms of coverage. One protects employee benefit plans against fiduciary misconduct while the other protects fiduciaries.
- Fiduciary Liability Insurance: Protects fiduciaries personally against claims of breach of duty, errors, mismanagement, poor investment decisions, or omissions when managing the plan.
- ERISA Bond: Protects employee benefit plans against losses resulting from fiduciary misconduct, such as theft, fraud, and embezzlement.
Fiduciary liability insurance is not mandatory like ERISA bonds. They are optional packages that complement ERISA bonds and can cover other costs, such as legal defense bills and settlements.
What Does an ERISA Bond Cover?
Section 412 of the ERISA Act states, “Every fiduciary of an employee benefit plan and every person who handles funds or other property of such a plan shall be bonded.” The purpose of bonding fiduciaries is to replace plan assets lost due to fraudulent or dishonest acts by those who handle plan funds.
Therefore, the ERISA bond provides specific coverage, such as:
- Misappropriation of a plan’s assets.
- Conversion of plan assets by handing them over to private hands.
- Other dishonest acts that lead to the loss of a plan’s funds, such as larceny.
- Theft and embezzlement of a plan’s funds by people entrusted with managing them.
- Forgery or alteration of financial documents, such as checks, resulting in loss of funds.
It is also prudent to understand the limitations of the ERISA bond cover. Below are some of the factors contributing to financial losses not covered by the bond:
- Investment Losses: Financial losses from market fluctuations or poor investment decisions are not covered by the bond.
- Administrative Errors: Mistakes such as calculation errors, missed deadlines, inaccurate interpretation of plan documents, or negligence in administration are not typically covered unless they were caused by fraudulent intent or dishonest conduct.
- Fiduciary Breaches: An ERISA bond does not provide coverage for claims arising from a fiduciary’s breach of their duties that result in financial losses.
- Acts of Third Parties Who Don’t “Handle” Plan Assets: Consultants or investment managers who do not have physical control over funds are not covered under the ERISA bond.
Who Needs to Be Bonded Under ERISA?
Any person who handles the funds or other assets of an employee benefit plan must be bonded under the ERISA Act, unless the Act specifically exempts them.
What the ERISA Act envisions as handling a plan’s funds or assets includes:
- Physical contact with cash and checks.
- Authority to transfer funds from the plan to a third party or to oneself.
- Authority to negotiate the plan property, for example, signing for mortgages.
- The power to disburse funds.
- The power to sign checks or other financial instruments.
Examples of people who may have such access include:
- Plan sponsors like your company.
- Third-party administrators.
- Investment advisors.
- Plan fiduciaries
- Trustees
ERISA Bond Requirements and Compliance
The ERISA bond requirements you will be expected to meet are often straightforward.
Here is what you will need to do:
- Minimum Coverage Amount: The law requires the bond to cover at least 10% of the plan’s total funds handled in the previous financial year.
- Statutory Minimums and Maximums: The minimum amount an ERISA bond can cover is $1,000 per plan, while the maximum bond coverage amount is usually $500,000. However, the maximum amount increases to $1,000,000 when the plan also holds the employer’s securities. Even if 10% of the plan’s assets do not exceed $1,000, the minimum amount remains $1,000.
- Other Assets: If more than 5% of plan assets are in non-qualifying assets, the bond generally must be the greater of 10% of plan assets or 100% of those non-qualifying assets (unless the plan opts for an annual CPA audit instead).
- Choice of Surety: The surety or reinsurer that issues the bond must be listed on the Department of the Treasury’s Listing of Approved Sureties, Department Circular 570.
- Plan Fiduciary Interests: Fiduciaries are not allowed to have any substantial financial interest, either direct or indirect, in the surety, reinsurer, or agent who brokered the bond.
- Name of the Insured: The bond should explicitly name the plan as the beneficiary of the ERISA bond, or at least identify the plan in a manner that can allow the plan’s representatives to make a claim directly against the insurer in case of a loss.
- Duration of the Bond: An ERISA bond may have a term of more than one year if it provides coverage for the required amount each year.
- Increases in Funds: The bond amount is determined by using the highest amount of funds the plan handled the previous year. If the amount of funds managed by the plan increases dramatically within the year after the purchase of the bond, you do not have to renew the bond to adjust to the increased asset value.
The ERISA Act also allows bonds to take several forms to be compliant.
They include:
- Individual
- Name schedule, which covers several named individuals.
- Position schedule listing the individuals holding specific positions in the plan’s management covered by the bond.
- A blanket is a general cover for officers and employees, without a specific list or schedule of covered individuals.
- A combination of the four forms.
Under the ERISA Act, some entities and plans are exempt from meeting the requirements mentioned above. They include:
- Unfunded employee benefit plans
- Most banks and insurance companies
- Registered brokers and dealers
- Governmental plans
- Church plans are exempt from Title I of ERISA
- Plans used by employers to comply with workers’ compensation, unemployment compensation, or disability insurance laws.
- Plans domiciled outside the US primarily for the benefit of non-resident individuals.
Failure to meet these requirements can result in non-compliance, which could have consequences such as:
- Plan Audits: The Department of Labor can send investigators to your business to audit your plan’s bond coverage.
- Personal Liability: A plan’s fiduciaries can be held personally liable under ERISA’s general fiduciary duty rules for losses to the plan that should have been but were not covered by a bond.
Please note that there are no specific monetary penalties for failing to obtain adequate bonding coverage.
How ERISA Bonds Work
ERISA bonds follow five main steps whenever issues arise. These are as follows:
1. Detection
Regularly reconcile your plan’s account transactions and conduct independent internal audits to identify potential fraudulent transactions early.
Once you discover suspect activity, such as account shortages or unauthorized transactions, you should document it immediately to preserve evidence. Additionally, freeze the affected accounts and restrict access to the plan’s funds until the matter is resolved.
2. Notification
Your plan administrator will notify your bond insurer of the losses. They then file a claim with the issuer and provide supporting documents, such as audits, bank statements, and investigative reports, to prove the existence of fiduciary misconduct.
The administrator should also notify the plan’s ERISA counsel of the suspicious activity and follow any other claim procedures outlined by the bond agreement.
3. Investigation
The bond insurer will acknowledge receipt of your claim and open a claim file. They will then assess your policy to determine its cover period and limits, as well as the persons covered by the bond.
Once the insurer determines the policy is valid and you are not trying to exploit your coverage, they will conduct internal investigations to ascertain the claim’s legitimacy. The investigation will also include background checks and interviews with all parties who have access to the funds.
4. Payment
The insurer’s forensic accountants will distinguish and quantify losses from dishonest acts from those arising from non-covered reasons, such as administrative errors. Next, the bond issuer will pay your plan up to the pre-determined bond limit.
The insurer reserves the right to recover the funds from the fraudulent actors through civil lawsuits and settlement negotiations.
5. Plan Restoration
The plan restores the accounts of affected parties and may pursue other legal remedies against individuals who breached their fiduciary duties. Your plan administrators may also receive recommendations from the bond issuer on how to improve internal controls to prevent further losses.
Other post-restoration activities may include the insurer requiring you to regularly monitor and report your plan’s status to ensure you are implementing its recommendations.
ERISA bonds can be complex and confusing for managers and HR leaders encountering them for the first time. However, they are among the most essential pieces in your fiduciary puzzle.
For this reason, we recommend that businesses partner with experts to help them navigate the process. At Ethos Benefits, we’ll help you meet your ERISA-level fiduciary responsibilities with confidence, whether through compliance oversight or proactive plan management.
Schedule a discovery call to strengthen your fiduciary oversight.
Note: Ethos helps ensure ERISA compliance through fiduciary consulting, not bond issuance.
Where to Buy ERISA Bonds
You can only buy ERISA bonds from surety companies and reinsurance providers authorized by the Department of the Treasury. The list of approved companies is available in the Department Circular 570.
Companies you will find on that list include:
- National, state, and regional surety companies.
- Specialized insurance brokers with expertise in employee benefits.
- Online bonding platforms.
ERISA Bond Cost
ERISA bonds offer considerable protection at a relatively affordable cost. For many ERISA bondholders, the annual premiums can be as low as $100. However, the price generally does not exceed a few hundred dollars, depending on the bond’s size and associated risks. Getting multi-year bonds also lowers the annual premiums.
Factors that influence the cost of an ERISA bond include:
- Total bond amount
- Number of individuals covered
- Plan sponsor’s financial strength
- Perceived risk of dishonest acts
One way to reduce costs is to take a blanket coverage that shields the plan against the acts of all plan officers and employees, not just those in prominent positions.
You should also enhance internal controls to minimize risks that could increase your premiums.
Best Practices for ERISA Bond Management
Having an excellent ERISA bond management plan ensures you stay compliant with the ERISA Act of 1974. It also ensures that you provide sufficient protection for your employees’ hard-earned benefits.
Some practices to consider to streamline ERISA bond management include:
- Review Coverage Regularly: ERISA bonds offer coverage based on the size of a plan’s assets, hence the need to ensure the bond meets your plan’s asset threshold. Ideally, you should conduct a review annually before renewing the bond; however, you can do it more frequently if necessary.
- Document Everything: Keep records of your bonding activities to ensure you are always aware of the level of coverage provided to your employees’ benefit plans. It also makes audits easier, since you will have all the files in one place.
- Choose Your Partners Wisely: Ensure the companies or brokers you choose to work with understand the ERISA Act and have experience purchasing ERISA bonds.
- Educate Fiduciaries: Conduct regular seminars or workshops to remind fiduciaries and any other individuals with access to your employees’ benefit plans of their responsibilities. You should also remind them of the risks associated with handling benefit funds and the consequences of misconduct.
- Consider Other Insurance Coverage: Consider fiduciary liability insurance to complement the ERISA bond and provide additional coverage for your employees.
Frequently Asked Questions (FAQs)
For more information, here are answers to some common questions we receive about ERISA bond covers:
Is an ERISA Bond the Same as a Surety Bond?
No. An ERISA bond is not the same as a surety bond. However, an ERISA bond is a type of surety bond called a fiduciary bond. A surety bond protects an individual or company from financial losses if another party to an agreement fails to meet its terms.
Conversely, an ERISA bond protects employee benefit plans against losses arising from dishonest conduct by the plan’s fiduciaries.
Can One ERISA Bond Cover Multiple Plans?
Yes. One ERISA bond can cover multiple plans. However, the minimum coverage amount for each plan should be at least the minimum amount required to bond the plan individually.
Moreover, the claims of one plan cannot interfere with the coverage offered to other plans under that bond.
How Often Should an ERISA Bond Be Reviewed?
It is advisable to review an ERISA bond annually to guarantee compliance with federal laws. This is because the cover amount an ERISA bond must offer is based on a plan’s assets, and fluctuations in asset value can affect the bond amount.
Read more about the ERISA compliance checklist.
Conclusion
An ERISA bond is a mandatory, cost-effective safeguard that will protect your employees’ benefit plans against the fraudulent or dishonest acts of those responsible for managing plan assets. It reimburses plans for losses arising from theft, forgery, embezzlement, and other similar behavior. However, it does not protect against losses caused by poor management practices.
And that is where it gets confusing for many companies. Additionally, while understanding ERISA bond requirements is crucial, the guidelines are subject to frequent changes, which can be challenging for companies to keep up with.
The solution? Partnering with a trusted fiduciary advisor who anticipates compliance shifts before they impact your plan. Ethos Benefits brings fiduciary expertise rooted in 401(k) plan management to help you safeguard your employee benefits against losses attributed to fraud or embezzlement. We help you build a compliant program that protects your organization and delivers real value to your team.
Take the first step. Book a one-on-one call with us today.
