The Employee Retirement Income Security Act of 1974 is the law that created ERISA bonds. Essentially, these bonds provide a regulatory framework for employer-sponsored retirement plans. The legislation aims to protect all participants and beneficiaries in sponsored retirement plans. Read on to learn everything you need to know about ERISA bonds.
What Is an ERISA Bond?
An ERISA bond is a fidelity surety bond that involves a contract between three parties that include the obligor, obligee, and surety. As the term suggests, a surety is a company that will guarantee that there will be no problems, and in most cases, sureties are big insurance companies. The obligor is the party being bonded while the obligee is the person who shall get the benefits of the bond if some problems arise from the obligor. Concerning the ERISA bond, an obligor is a person responsible for managing the ERISA pension fund’s assets. The obligee is the beneficiary.
However, issues like theft, embezzlement, misappropriation, and forgery are often common. The other notable aspect about ERISA bonds is that they do not have deductibles meaning that all the liability rests on the surety. As a result, the pension plan has to be named as the appropriate beneficiary of the surety bond to cover financial losses that may be caused by elements like dishonesty or fraud. The primary goal of ERISA bonds is to protect the beneficiaries and the employees participating in these types of employer-sponsored retirement plans.
How Do ERISA Fidelity Bonds Work?
Unless they are covered under ERISA’s exemption provisions, every person who manages the property or funds of the employee benefit plan must be bonded. It is unlawful for any person who is not bonded to receive, disburse, handle, or control the funds or property. The bonding coverage may also include other parties like service providers who are authorized to access the plan’s funds. These parties can also play a role in the decision-making process, which can increase the risk of financial loss through dishonesty or fraud.
ERISA bond is the most common type of fidelity bond, and it is obligatory. When the employer offers an ERISA plan, the employees who are part of the plan should get protection against issues like fraud or mishandling of funds by the employer. One of the key requirements for ERISA is that individuals responsible for handling the assets of the retirement funds should have a fidelity bond that is issued on them. Similarly, ERISA bonds achieve their goals of protecting the beneficiaries by following different rules and regulations that include:
- The employees should disclose certain information about the employer-sponsored plan
- Those acting as a fiduciary of the employer-sponsored plan should follow ERISA rules specifically created for them
- Both participants and beneficiaries are granted rights by ERISA.
The participants have a right to sue if they feel that they have been harmed by incompetence or misconduct of the plan sponsors.
How ERISA Fidelity Bond Differs from Fiduciary Liability Insurance
The fidelity surety bond under ERISA is designed to protect a plan against losses due to dishonesty or theft caused by people who handle plan funds. On the other hand, fiduciary liability insurance helps insure the plan against mismanagement of funds which can involve negligence. ERISA is the only element that meets the statute requirements. The bonds come with specific terms and conditions, and they do not include any deductible in an insurance contract.
ERISA Bond Coverage
The fiduciaries are required to be bonded for at least 10% of the total amount of the funds they will handle. The maximum bond amount for any plan is $500,000, a minimum of $1,000 is required for smaller plans. Higher coverage of $1,000,000 can still be obtained even if minimum figures are listed.
Do Insurance Providers Issue ERISA Bonds?
ERISA bonds are generally purchased directly from insurance companies, or they can be bought indirectly through insurance agents. The Department of Treasury has a list of all providers approved together with insurance companies. Many plan providers will refer you to an insurance company, but they can not undertake the work for you. None of the interested parties may have financial interest or control of the surety, agent, or insurer where the bond is usually obtained. There are certain conditions under which ERISA bonds can be obtained from a special insurance market also called the Underwriters.
The Employee Retirement Income Security Act is responsible for regulating ERISA bonds. These are employer-sponsored retirement plans that aim to protect the interests of the employees. Only those who are fully bonded or their beneficiaries can handle the plan funds. Essentially, a surety is responsible for ensuring that the plan funds are safe and preventing misappropriation by unauthorized parties.