Retirement comes sooner than people expect. If you are someone who works with money within the retirement field, obtaining an ERISA bond can be necessary. An ERISA bond is a type of insurance that is used to protect people who participate in employee benefit plans, such as a defined benefit plan, a pension fund, or a 401(k) plan. These bonds are required for employees who have administrative access to the retirement fund.
What is a fiduciary?
Fiduciaries are individuals who are appointed to oversee and manage employee benefit plans. This implies that they should always be working in their clients’ best interests. The fiduciary is the principal in this case, meaning that he or she is the one who purchases the ERISA bond(s) for beneficiaries (obligees) who require the bond. A 401(k) plan is the principal (insured), the surety company is the insurer, and the plan official is the obligee.
To better understand the three-party agreements found in surety bonds, visit our post on surety bond misconceptions.
ERISA Fidelity Bond
The main thing to understand about an ERISA fidelity bond is that the bond protects the company and plan participants from blatant acts of fraud or misconduct. According to the Department of Labor, the ERISA bond covers the plan. These bonds will cover losses up to the coverage limit. Note that this bond is required.
Fiduciary Liability Insurance
Fiduciary liability insurance is different than an ERISA fidelity bond. Fiduciary liability insurance covers the fiduciary. Fiduciary liability insurance, however, focuses more on protecting people from small errors they might have made. For example, fiduciary liability insurance typically covers fiduciaries who lost their job through situations such as an incorrectly completed form or a risky investment. Note that this insurance is not required, whereas the bond is. This type of coverage is sometimes compared to errors and omissions coverage.
What is the Employee Retirement Income Security Act?
The Employee Retirement Income Security Act (ERISA) became federal law when it was passed in 1974 and is overseen by the United States Department of Labor. It was enacted with the intention of protecting individuals who contribute to pension and health plans in private industries. The law requires individuals to be given plan information; it also sets participation, vesting, and benefits accrual standards and creates grievance and appeal processes. ERISA established the Pension Benefit Guaranty Corporation, guaranteeing certain benefits will be paid even if the benefit plan itself is discontinued.
ERISA bond requirements
To issue an ERISA bond, we need information to determine the bond amount and plan:
- Business name (plan sponsor)
- Plan name (name of the 401(k) or pension)
- Address
- Contact information
- According to the Department of Labor, each person must be bonded in an amount equal to at least 10% of the amount of funds he or she handled in the preceding year.
- SuretyBonds.com can issue ERISA bonds quickly, easily, and accurately. SuretyBonds.com can issue an ERISA bond at a minimum of $10,000. ERISA bonds written for $500,000 or less can be instantly issued, which means a poor credit score won’t affect your ability to get bonded. ERISA bonds issued in amounts between $500,000 and $5 million are subject to underwriting.
Can an ERISA bond insure more than one plan?
Yes, an ERISA bond can cover more than one plan. However, the bond must provide enough coverage to be at least equal to what would be necessary for each plan’s recovery if the plans were issued separate bonds.
If the person who is being covered is handling more than one plan, the bond must cover at least 10% of the total amount that that person handles in all the plans insured under the bond [29 C.F.R. § 2580.412-16(c), § 2580.412-20]. [See also Amount Of Bond, Q35 through Q42.]
Why ERISA bonds are critical
ERISA bonds are far more critical than you might think. In December 2020, a couple was sentenced to prison due to a $15 million embezzlement scheme. According to 401k Specialist, this was a retirement scheme in which a couple stole and transferred money into their personal savings; the wife will owe $12.6 million in restitution, while her husband will pay $7.4 million. ERISA bond coverage can prevent you from losing money as a victim of fraud.
Likewise, fiduciaries need to realize that obtaining these bonds can help them in the near future and can save them from backpay for years’ worth of coverage. According to the ASPPA, there have been instances in which plans went without fidelity bonds and were then told to buy retroactive bond coverage. In one case, a plan that went 20 years without a bond had to go back and buy bond coverage retroactively for all 20 years. This is why obtaining continuous ERISA bond coverage is crucial for companies.
How does an ERISA bond protect retirement savings?
ERISA bonds protect retirement accounts by guaranteeing money is available if the fiduciary mishandles the funds entrusted to him or her. If a claim is made against the bond, and the principal to whom the bond is issued does not reimburse the plans these bonds cover, the surety will pay up to the full amount of the bond to cover the cost of the claim.
For example, if money in a 401(k) retirement plan is lost due to embezzlement of funds by an employer, the bond is in place to replace those funds, meaning members of that plan are not at risk of losing their money due to an unscrupulous employer.
As confusing as ERISA bonds can be, understanding their purpose is crucial for those working within the retirement planning field. This type of insurance protects people who participate in employee benefit plans and has several requirements one should know about before purchasing the bond. To get a free, no-obligation quote for an ERISA bond today, contact SuretyBonds.com at 1 (800) 308-4358.