ERISA Bonding

• The Employee Retirement Income Security Act, usually abbreviated to ERISA, is a rule that regulates employee benefit plans. Specifically, it protects employee benefit plans from dishonest and fraudulent activities of the account custodians. ERISA bonds guarantee any losses that may arise from mismanagement. The reason for ERISA bonding is that fidelity bonds tend to be relatively safe investments. These safer investments will then in turn mitigate any losses that arise from the mishandling of riskier securities found in an employee benefit plan. The type of bond purchased by the plan manager is known as a surety bond.
  
  

Surety Bonds

• Unlike other types of bonds, such as federal treasury or corporate bonds, surety bonds do not offer a repayment of the bond's face value upon a maturity date. Instead, purchasing such bonds is somewhat similar to an insurance policy, and the bond will mature whenever any losses are suffered by the insured plan. When applying for a surety bond, a surety professional will analyze the buyer's ability to perform their obligations relevant to the financial plan before issuing the bond.
  
  

ERISA Liability Limits

• The limit of liability required by ERISA is calculated based on a formula. For each person requiring bonding -- that is, employees, managers and vendors -- 10 percent of handled assets must be bonded. The minimum amount bonded must be equal to $1,000, and the maximum must equal $500,000. If an employee benefit plan's assets consist of securities derived from the contributing employer and are not part of a mutual fund, this maximum increases to $1,000,000.
  
  

Bond Structuring

• In addition to the liability limits of employee benefit plans, there are three different ways to structure the bonds. Narrow structuring covers fund manager dishonesty and fraud. Moderate structuring expands liability coverage for any problems affecting a bond caused by a third party. Broad structuring covers any mishaps caused by any individual handling the bond. Thus, in addition to the limits purchased for narrow structuring, higher limits are available for purchase for moderate and broad structuring. The limits for these will depend on the structure of the employee benefit plan itself.