The What, Who, and How Much of ERISA Bonds
Designing a retirement plan for your company that maximizes the benefits to both you and your employees is a complex and multi-layered task. You have options ranging from a Defined Benefits Pension Plan to an employee-directed 401(k). But, whichever retirement package or packages you decide to offer, the most important thing is that you protect both your business and your employees from losses due to theft or fraud, because it won’t matter which retirement products you can offer to your employees if their money is not protected. In order to ensure your employee benefit plans are safe from mismanagement or otherwise dubious behavior, it’s vital to secure an ERISA bond. As a business owner offering a retirement savings plan, you should know what this type of bond is, who is required to get one, and how much coverage should be obtained.
An ERISA bond is, in its most basic sense, a form of insurance against any potential dishonesty or misappropriation of retirement savings funds. In 1974, the Employee Retirement Income Security Act created a regulatory framework for employer-sponsored retirement plans. prior to this legislation, employees had no protection or recourse if their pensions or 401(k) plans dried up overnight due to embezzlement, misappropriation, or any number of other dishonest acts. ERISA bonds are essentially special insurance policies that protect employees and other employer-sponsored retirement plan beneficiaries against loss.
ERISA makes it illegal for anyone to “receive, handle, disperse, or otherwise exercise custody or control of plan funds or property” without the proper bonding (aka, insurance plans) in place. When considering who should get an ERISA bond, ask yourself if the person in question had:
• Physical contact with cash, checks, or property belonging to the employer sponsored retirement plan
• The authority or ability to transfer funds away from the employer sponsored plan and to either themselves or another party
• The authority or ability to negotiate plan property
• Any other disbursement direction authority
• The authority to sign checks or other instruments to convey funds or property
• Supervisory or decision-making responsibility over activities that require bonding
Once you’ve decided who is required to be covered by an ERISA bond, the next step is to understand how much insurance coverage it needs to include. three points are most salient here.
1. In almost all cases, ERISA Bond coverage can’t be less than $1000 nor can it be more than $500,000.
2. Each individual who fits the aforementioned description must be covered for, at least, 10% of the total amount they handled or had access to in the previous year.
3. Maximum coverage required can be extended to $1 million when the plan includes securities issued by the employer itself, such as when a company holds shares of its own common stock in its employer sponsored retirement plan.
The best way to ensure that you have covered all your fiduciary bases, including obtaining an ERISA bond, when offering an employer-sponsored retirement plan is to partner with an experienced retirement plan management firm.
