Q: What is an ERISA bond?

A: An ERISA bond is basically another form of insurance for employee benefit plans. The bond is taken against those who control the plan funds (otherwise known as a fiduciary). Though definitions vary, in most instances a fiduciary is a person who exercises some amount of power and control over the plan.  In an ERISA qualified pension plan, the investment manager, investment advisors, and trustee are all considered fiduciaries. The ERISA bond ensures that plan participants are protected against losses due to fiduciary fraud, dishonesty, or otherwise criminal behavior. However, unlike standard insurance, the ERISA bond is not necessarily meant to cover full losses. It will only cover up to the pre-calculated payout amount.

Q: There’s already insurance on my pension plan. Does that mean an ERISA bond is unnecessary?

A: No. The existing insurance is most likely what is referred to as ‘errors & omissions’ insurance. E&O insurance specifically protects against fiduciary mistakes, and, depending on the plan, may protect against neglect. E&O insurance doesn’t overlap with ERISA bond coverage. Remember, ERISA bonds protect against fiduciary fraud or dishonest acts. Your pension plan can and should be covered by both E&O insurance and an ERISA bond.

Q: Are ERISA bonds required by law?

A: Technically, yes. ERISA regulations demand that generally all employee benefit plans be covered by an ERISA bond. Interestingly, however, ERISA regulations do not outline any penalties for fiduciaries that choose not to purchase ERISA bonds for their plan.

Q: What happens if there’s no ERISA bond coverage for the plan?

A: If there’s a loss as a result of fraud, dishonesty, theft, or some other criminal act, then the fiduciaries will have to pay out-of-pocket for the losses. In other words, they will become personally liable for the losses. Losses will therefore be accounted for in most cases, unless the fiduciary doesn’t have the personal assets to cover the losses.

Q: Are there specific ERISA bond requirements?

A: ERISA bonds have several requirements as outlined by the statutory provisions of ERISA Section 412:

• The bond must have a minimum payout equal to at least 10% of the plan assets. However, the payout cannot be less than $1,000 or more than $1,000,000.
• The bond cannot have a deductible.
• The bond must be in the name of the retirement plan or a trust, or it must in some way identify the plan so that representatives can make a claim under the bond, if need be.
• The bond amount must be fixed annually, for each fiduciary, depending on the plan asset total.
• The plan must be placed with a Department of Treasury-approved surety or reinsurer, and the plan fiduciaries cannot have any control or interest in the surety or reinsurer.
• The bond must cover ERISA regulation criminal losses.

Q: Is an ERISA bond expensive?

A: No. In fact, the premiums for ERISA bonds tend to be relatively low cost. The price depends on the total plan assets, but most insurance companies charge from between $100 and $300 per year for ERISA bond coverage.

Q: What conduct does an ERISA bond cover?

A: ERISA contains a number of civil and criminal provisions. ERISA bonds specifically cover criminal acts by the fiduciaries. These acts include, but aren’t necessarily limited to:

• Larceny
• Theft
• Embezzlement
• Forgery
• Wrongful Conversion
• Willful Misapplication

Q: Is an ERISA bond always necessary, in practical terms?

A: No, an ERISA bond isn’t always necessary, though having one is encouraged. In some cases, there’s an existing corporate fidelity bond arrangement in place, so an ERISA bond may simply be redundant. Corporate fidelity bonds, like ERISA bonds, cover dishonest, fraudulent, and criminal behavior by plan fiduciaries.