What Does an ERISA Fidelity Bond Cover for Your Plan?
Discover how ERISA fidelity bonds safeguard retirement plan assets from financial misconduct by those managing them, ensuring participant security.
An ERISA fidelity bond protects employee benefit plans, particularly those offering retirement savings. This bond safeguards plan assets against potential losses resulting from fraud or dishonesty committed by individuals who handle plan funds. It protects participants’ retirement savings from misconduct by those entrusted with managing the plan’s finances. This requirement helps maintain the integrity and security of employee benefit plans.
Understanding ERISA Bonds
An ERISA fidelity bond is insurance that protects an employee benefit plan from financial losses. These losses arise from acts of fraud or dishonesty by persons who handle the plan’s money or other property. Unlike other insurance, such as fiduciary liability insurance, which covers errors or omissions by fiduciaries, an ERISA bond focuses on intentional misconduct.
The Employee Retirement Income Security Act of 1974 (ERISA) mandates this bonding for most private-sector employee benefit plans, including 401(k)s and pension plans. The bond ensures that if plan assets are stolen or mishandled through dishonest acts, the plan has a source of recovery.
Who Requires an ERISA Bond
An ERISA fidelity bond is required for every fiduciary and any other person who handles funds or other property of an employee benefit plan. Individuals with direct access to, or control over, plan assets must be bonded. Examples include plan administrators, trustees, and employees of the plan sponsor who manage contributions or process distributions.
The bonding requirement is based on the function an individual performs, rather than their specific job title. If a person has the ability to exercise control over assets, such as signing checks, making investment decisions, or handling cash, they are subject to the bonding requirement. Exceptions exist for plans fully insured by regulated insurance companies or for assets held by federally supervised financial institutions.
What Acts an ERISA Bond Covers
An ERISA fidelity bond covers losses to an employee benefit plan resulting from acts of fraud or dishonesty. These acts are committed by individuals who handle the plan’s funds or other property. The bond protects the plan, safeguarding participants’ interests against deliberate misconduct and financial malfeasance.
The scope of covered dishonest acts is broad, encompassing any act intended to cause the plan a loss, including wrongful abstraction, fraudulent conversion, or willful misapplication of plan assets. This includes overt acts like the physical theft or embezzlement of plan funds, where money or securities are illegally taken for personal gain. It also covers more subtle forms of misconduct, such as the misappropriation of plan assets, which involves the improper or unauthorized use of plan money contrary to its intended purpose or directive.
The bond provides coverage for losses due to forgery or alteration of documents related to plan assets, such as falsifying financial records, checks, or investment instructions. Larceny, which is the unlawful taking of personal property with intent to deprive the owner permanently, is also included. Other covered dishonest acts might involve intentional misrepresentation, or the making of false entries in the plan’s books and records with the intent to defraud the plan.
The bond does not cover losses arising from errors, omissions, or poor investment decisions, but rather focuses on intentional criminal acts. It serves as a direct reimbursement mechanism for the plan once such a loss is discovered and proven.
Obtaining and Maintaining an ERISA Bond
Obtaining an ERISA fidelity bond is purchased from a surety company or through an insurance broker specializing in employee benefits. These entities issue the bond, which functions as a guarantee to the plan. The bond’s cost can vary based on the required amount and the plan sponsor’s financial standing.
The required bond amount is 10% of the total funds handled by the plan or by the individuals subject to bonding during the preceding plan year. A minimum bond amount of $1,000 applies. The maximum required bond amount is $500,000, but can extend to $1,000,000 for plans holding employer securities.
Maintaining an ERISA bond requires periodic review and adjustment of the bond amount, especially if the plan’s assets significantly change. The bond must be kept active and renewed annually for continuous coverage. Plan fiduciaries are responsible for ensuring the bond remains in force and adequately covers the plan’s assets and those handling them.