ERISA bonds, sometimes referred to as “401k bonds” or “ERISA fidelity bonds”, are a subset of the broader category of fidelity bonds that are required by the U.S. Department of Labor (DOL) to comply with the Employee Retirement Income Security Act of 1974 (ERISA). The legislation requires a fidelity bond for employee benefit plans regulated under ERISA, which means most retirement plans offered by private companies (defined contribution 401k plans, defined benefit plans, employee stock ownership plans, etc.) need to be bonded. ERISA bonds protect retirement plans against losses caused by acts of fraud or dishonesty.
ERISA bonds must be issued by insurance carriers on the Department of the Treasury’s Listing of Approved Sureties, Circular 570, also known as T-listed carriers. The insurance carrier issuing any surety bond, such as an ERISA bond, will also be referred to as the “surety company” or “bond company”.
Retirement plan trustees are required to purchase ERISA bonds by the Department of Labor to protect retirement plan participants by transferring to a surety bond company the cost of ensuring the plan participants are compensated for damages resulting from a trustee violating his/her fiduciary duties under ERISA up to a limit specified in the bond (“penal sum” or “bond amount”).
ERISA bond violations triggering a bond payment may include a plan trustee stealing plan assets or using plan funds without benefit to the plan participants.
ERISA bonds costs as low as $100 for a 3 year term. Rates are determined based on the bond amount needed.
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ERISA requires plans to obtain a fidelity bond for a minimum of 10% of the total plan assets with a maximum bond requirement of $500,000 for most plans. As plan assets grow, the bond amount must be increased to maintain the 10% minimum. Retirement plans that contain employer securities may be required to obtain bond amounts up to $1,000,000. Surety companies issuing ERISA bonds often include a policy feature that automatically increases the bond amount as the plan assets increase, provided the required minimum bond amount was purchased at the inception of the bond term.
Credit checks are not required to purchase an ERISA bond.