BONDING AND FIDUCIARY LIABILITY INSURANCE
The Employee Retirement Income Security Act of 1974 (“ERISA”) is a federal law of the United States that sets minimum standards of conduct for most voluntarily established retirement and health plans in the private industry to provide protection for individuals in those plans. The provisions of ERISA, which are administered by the U.S. Department of Labor, were enacted to address public concern that funds of private pension and other employee benefit plans were being mismanaged and abused.
A critical aspect of ERISA is that of the ERISA bond – a tool that covers administrators to protect against acts of fraud and dishonesty. An ERISA bond is a compulsory requirement (subject to some exemptions) and is essential for the protection of retirement plans.
The bond is an insurance policy that applies to retirement plans that fall under ERISA’s jurisdiction. An ERISA bond protects these plans against losses that may result from fraud or dishonesty by the people in charge.
Every person who “handles funds or other property” must be bonded (unless exempted). This encompasses those whose duties and functions involve receipt, handling, disbursal, custody or control of plans or property, including the plan administrator, responsible principals and employees, the plan sponsor, and in some cases, service providers.
Failure to carry a bond, could result in the Department of Labor imposing financial penalties, sanctions, and criminal penalties.
ERISA requires that the bond meets specific requirements:
ERISA fidelity bonds are sometimes confused with fiduciary liability insurance. While the ERISA bond specifically insures a plan against losses due to the acts of fraud or dishonesty by persons responsible for managing plan funds or property, fiduciary liability insurance insures fiduciaries, and in some cases the plan itself, against losses essentially caused by mismanagement impacting the plan and participants. Fiduciary liability insurance ought also to be considered but it is not required and does not satisfy the fidelity bonding required pursuant to ERISA.