For independent agents who provide employee benefits coverage to their commercial clients, offering Employee Retirement Income Security Act (ERISA) bonds are a natural addition. Generally, ERISA bonds are quick and easy to write, the loss ratios are low, and the premiums are competitive. For example, an insurance agent can secure a $200,000 bond for $100 in annual premium.

By understanding the ins and outs of an ERISA bond and what it protects against, independent agents can better position themselves to offer this important coverage to their clients.

Since 1974, when ERISA became law, companies that want to offer their employees a retirement plan moved away from traditional pension plans, known as defined benefit plans, to retirement plans like 401(k) plans, known as defined contribution plans. Employers usually contract with large money managers to handle the administration of these plans and advise plan participants on their investment choices.

ERISA was enacted to “address public concern that private pensions and other employee benefit plans were being mismanaged and abused," according to the U.S. Department of Labor (DOL), which administers the program. Under ERISA, all individuals who handle retirement plan funds and other property must be covered by an ERISA fidelity bond. This includes the person within the company appointed by the employer to manage the plan on the company's behalf.

However, ERISA does have some exemptions. For example, the bonding requirements don't apply to church plans or government plans. Employee benefit plans that are completely unfunded—where the benefits are paid directly out of an employer's or union's general assets—are also exempt, as are insured welfare plans and solo 401(k) plans.

How do employers protect themselves and their employees from dishonesty and fraud that may be committed by plan administrators? They obtain a fidelity bond—also known as an ERISA bond—which is required by law. These bonds help employers ensure compliance with the DOL's requirements and protect their businesses from financial losses caused by dishonest acts.

For any business, having a safe and secure retirement fund is critical. With an ERISA fidelity bond in place, retirement savers and employers offering benefit plans like 401(k)s can rest easy knowing that the bond will reimburse any financial losses caused by acts of fraud or dishonesty.

Common Violations

The employee benefit plan is the named insured on the bond, and a surety company is the party that provides the bond to cover anyone, including the employee benefits manager within the company, who may “receive, handle, disburse, or otherwise exercise custody or control of plan funds or property."

As the insured party, the employee benefit plan can make a claim on the ERISA bond if a plan fiduciary causes a covered loss to the plan due to a wrongful act, such as larceny, theft, embezzlement, forgery, misappropriation, wrongful abstraction, wrongful conversion, willful misapplication and more.

Some of the most common ERISA violations include improper denial of benefits to current or former employees, breach of fiduciary duty toward employees covered by plans, and interference with the rights of employees covered by plans.

If the plan fiduciary is found liable for any wrongdoing and the bond is used to cover any settlements, the surety has the right to pursue reimbursement from the fiduciary through various mechanisms.

Required Coverage

Every person who “handles funds or other property" of an employee benefit plan must be bonded with coverage equal to at least 10% of the plan assets they managed in the preceding year. The minimum amount a standard plan can be bonded for is $1,000 and the maximum amount is $500,000.

Some plans require an ERISA bond up to $1 million. That is typically due to those plans containing non-qualifying assets, such as limited partnerships, mortgages, real estate or employer securities.

These amounts apply to each plan named on a bond. So, if a plan trustee, named fiduciary and administrator all have the same access and power over a plan's total assets of $2 million, they must each be bonded for at least 10% or $200,000. If the employer has more than one retirement plan—for example, a plan for highly compensated employees that is separate from the plan for the other employees—the fiduciaries of that plan must also be bonded for 10%.

One issue that arises is the value of a retirement plan's assets varies depending on the investment returns, the number of participants and the amount of their contributions. Some sureties provide an endorsement that increases the amount of the bond as the value of the plan assets increases to ensure that the plan remains in compliance with ERISA requirements.

Having a bond in place demonstrates a commitment to maintaining the highest standards of integrity and fiduciary responsibility. It also gives employees and stakeholders peace of mind that their interests and long-term well-being are of utmost importance.

By providing ERISA bonds, independent agents can help their commercial clients take proactive measures to protect employees' financial interests and earn trust and credibility in the marketplace.

Jenna Weiland is commercial surety underwriting consultant for Old Republic Surety, based in West Des Moine, Iowa.