Exploring the Role of ERISA Bonds in Safeguarding Retirement Plans
The Employee Retirement Income Security Act of 1974 (ERISA) requires that anyone who handles company plan funds get bonded. ERISA bonds protect plans against losses caused by dishonesty or fraud by those who manage the funds and other property.
Unlike other types of insurance, ERISA bond coverage doesn’t have a deductible. Here’s what you need to know about these particular policies.
The role of ERISA bonds in safeguarding retirement plans
The Employee Retirement Income Security Act, or ERISA, is a federal legislation that establishes requirements for the majority of freely created pension and health insurance plans in the private sector. It also grants participants and beneficiaries legal rights to sue in the US courts if they are victims of fraud or mismanagement of plan assets. An ERISA bond is a surety bond that protects plan sponsors, employees, and beneficiaries against financial losses caused by dishonesty and fraud.
Specifically, an ERISA fidelity bond covers losses caused by people handling plan funds or property, such as fiduciaries, directors, or officers of a company. It is a requirement of the law that anyone who manages money for an ERISA-covered plan gets bonded.
ERISA bonds are a vital component of safeguarding 401(k) investments. ERISA requires that all USA-based benefit and pension plan fiduciaries obtain ERISA fidelity bonds to protect themselves from potential losses caused by fraud or wrongdoing.
ERISA bond requirements
The Employee Retirement Income Security Act (ERISA) requires a fidelity bond to cover anyone who handles 401(k) or other retirement plan assets. The bond is an insurance policy that protects the plan from losses caused by fraud or dishonesty. The bond has three parties – the insured, the insurer, and the covered. ERISA bonds must provide at least $500,000 in coverage, and they can’t have a deductible – the plan must be protected from the first dollar of loss.
ERISA also mandates that persons who manage funds or other property of a pension, health, or welfare benefit plan must be bonded. This requirement applies to fiduciaries and those who handle plan funds.
In addition to ERISA bonds, companies should consider purchasing fiduciary liability insurance for their retirement plans. While ERISA bonds cover unintentional acts, fiduciary liability insurance covers a broader range of activities, including negligent actions not resulting from intentional mismanagement.
ERISA bond coverage
An ERISA or fidelity bond is an insurance policy that protects retirement plan funds from losses due to dishonesty and fraud committed by people who handle those plans. It is required for all people who take health and retirement plans under ERISA’s jurisdiction, and it covers up to a pre-calculated limit in the event of an upset.
Unlike fiduciary liability insurance, which provides broad coverage for alleged breaches of fiduciary duty, the ERISA bond is explicitly designed to protect a retirement plan’s assets from dishonesty and fraud. The bond cannot have a deductible and must name the plan as the insured party.
This is an essential tool to ensure that people who pay into pension and health benefits get them back in the event of an upset. Otherwise, retirees might be left with nothing to show for their hard work and sacrifice. This is particularly true for 401(k) plans, which are frequently at risk without this safeguard.
ERISA bond costs
The Employee Retirement Income Security Act requires that people with fiduciary responsibility obtain surety bonds to safeguard employees’ retirement and health benefit funds. These bonds protect the plan from losses resulting from dishonest and fraudulent acts such as theft, robbery, embezzlement, forgery, wrongful abstraction or conversion, and willful misapplication of funds.
The Department of Labor determines the bond amount and must represent at least 10% of the plan’s total assets. The minimum bond value is $1,000, and the maximum is $500,000. Bonds are required for all persons who handle the plan’s funds or property. This includes fiduciaries and anyone with the power to sign checks or other negotiable instruments.
ERISA bonds must be renewed annually, and the minimum and maximum bond values must be proportionally updated to reflect changes in plan asset totals. This allows for the best possible protection of the benefits of employees. However, there are certain exceptions to this requirement for regulated financial institutions, including select banks and financial institutions and registered brokers and dealers.