ERISA Bond

An ERISA bond is a form of insurance protection against any kind of mishandling or fraud perpetrated by individuals in charge of handling 401(k) accounts. If funds should be misappropriated or embezzled from the 401(k) fund, a claim against the bond would restore the missing amount of money.

Since the enactment of the Employee Retirement Income Security Act (ERISA), it has been mandatory for anyone managing a 401(k) plan, or any other kind of employee benefit plan, to purchase an ERISA bond, which is also referred to as a 401(k) bond. The amount of the bond has to be at least 10% of the total value of the 401(k) plan itself, up to a ceiling of $500,000. In certain cases, such as plans that include non-liquid assets like stocks or securities, higher bond amounts may be purchased, so that extra protection can be provided.

The 401(k) plan itself is protected against fraud, rather than any single participant of the plan, and the people who handle the plan are the parties who are covered by the terms of the bond. In some cases, those handlers are company employees, and at other times, the handlers work for a third party that provides professional account management services. From this, it can be seen that the 401(k) fidelity bond follows the typical fidelity-bond model, wherein three distinct parties are involved: the principal, the obligee, and the surety.

In this case, the principal is the handler of the 401(k) plan, the obligee is the plan itself, and the surety is the company that issues the bond. In the event of any mishandling of program funds, the surety company would be obliged to initially pay the missing amount, and then it would pursue the principal (the plan handler) to obtain reimbursement for the replenishment payment made to the 401(k) plan.

No. An ERISA bond is required by law, whereas fiduciary liability insurance is not. There is also a functional difference between the two, in that the ERISA bond is intended to protect plan contributors against the possibility of fraud or dishonesty by plan administrators, while the fiduciary insurance protects against breaches of responsibility. It happens quite often that the plan fiduciaries (administrators or trustees) have fiduciary insurance to be covered against any oversights or mistakes, but this does not satisfy the requirement mandated by ERISA.

Generally speaking, almost anyone who has the power to receive or disburse funds from a 401(k) plan must be covered by one of these special bonds. In actual practice, this includes plan administrators and staff officers who handle any kind of funds connected with the plan. If the activities performed by an individual connected with plan management could potentially result in a loss of funds from the program, that person needs to be bonded. FINRA would agree that the most common kinds of activities that these individuals are responsible for include the following:

• Authority to sign checks
• Authority to disburse checks
• Physical contact with cash or checks associated with a 401(k) plan
• Power to transfer assets from the plan to a third party, or to oneself
• Authority to negotiate for any plan assets or properties

When a bond is purchased for any kind of employee benefits program, it must be from a company approved by the Treasury Department, and the terms of the bond must not include any kind of deductible that reduces the liability of the surety company in any way. This is stipulated as further protection for all the plan participants, which is the point of enforcing the bond purchase in the first place.

It is extremely important for anyone who is in any way involved with the administration of a 401(k) plan to be sure that proper bonding has been purchased and that a valid bond is currently in effect. Since administrators can be held personally liable in the event of any loss of plan funds, it is critical that an adequate bond be provided for maximum participant protection, and indirectly for the plan administrators as well.