ERISA requires that anyone who handles funds or other property for an employee benefit plan (like a 401(k)) be bonded. The fidelity bond, also called a bond, serves as a safeguard for the plan against losses resulting from fraud or dishonesty.
Unlike fiduciary liability insurance, an ERISA bond names the benefit plan itself as the policy beneficiary.
What is an ERISA bond?
A fidelity bond, known as an ERISA bond, safeguards participants from any mishandling or fraudulent activities committed by a fiduciary. It is required by law to be in place for anyone who handles funds or property for an employee benefit plan, such as a defined benefit, pension, or 401(k). An ERISA bond differs from fiduciary liability insurance, which covers the cost of defense and applicable damages for breaches of fiduciary duty.
You can get an ERISA bond through an insurance carrier, surety company, or independent insurance broker listed on the Department of Treasury’s list of approved sureties. Be sure to compare rates and options from multiple providers before selecting one. An ERISA bond cannot have a deductible and must cover up to a pre-calculated maximum payout amount. This is the minimum coverage required by law. A separate fiduciary liability insurance policy is available if you need more coverage than this.
How does an ERISA bond work?
An ERISA bond is fidelity insurance that protects people who participate in a defined benefit plan, pension fund, or 401(k) plan from financial losses caused by dishonesty and fraud committed by the principal covered by the bond. It is also called an ERISA fiduciary bond or a trust fiduciary bond.
An individual or business that is a trustee or fiduciary for an employee benefit plan must obtain an ERISA bond. This includes a company’s employees’ assigned duties, such as the receipt, safekeeping, or disbursement of plan assets.
The bond provides fidelity (theft) coverage and must cover the maximum value of funds handled in any year. It must name the ERISA-covered plan as the “named insured” and be purchased from an insurance carrier or broker named on the Department of the Treasury’s listing of approved sureties. It must include an “Inflation Guard” provision to automatically increase the bond amount as the value of the bonded plan assets increases without increasing the bond premium.
Who needs an ERISA bond?
An ERISA bond is an insurance policy that protects the plan against financial loss caused by acts of dishonesty or fraud on the part of the person or persons who handle plan funds or property. The bond is a requirement under ERISA for any person who handles, controls or has access to funds or assets of an employee benefit plan. It covers losses due to larceny, theft, embezzlement, forgery, misappropriation, wrongful abstraction, and wrongful conversion of a plan’s assets. Deductibles are prohibited for coverage of losses under an ERISA fidelity bond.
You can obtain an ERISA bond from a surety company named on the Department of the Treasury’s listing of approved sureties. Some recordkeepers and other service providers may refer you to a provider of ERISA bonds, but they cannot issue the bond on your behalf. You must contact a surety company or insurance broker to apply for the bond. In addition to meeting the DOL’s requirements, an ERISA bond reinforces your organization’s commitment to maintaining high standards of integrity and fiduciary responsibility when managing employee benefits.
What is the cost of an ERISA bond?
The cost of an ERISA bond depends on the coverage amount. It can be as low as $200 annually for bonds that cover up to $500,000 in plan funds. A simple online application will quickly determine the price of your bond.
An ERISA bond protects retirement and benefit plans, participants, and beneficiaries against any fraudulent and dishonest activities by fund managers. It’s similar to fiduciary liability insurance in that it covers wrongful acts, but it’s designed specifically for retirement and benefits funds.
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