The Employee Retirement Income Security Act of 1974 (ERISA) protects company-sponsored employee benefit plans from losses attributable to fraud, misrepresentation or misappropriation of funds. The law requires that trustees of employee benefit plans purchase a fidelity bond and specified the requirements for coverage limits. The ERISA bond must equal 10 percent of the funds managed for the employee benefit plan. The minimum limit for an ERISA bond stands at $1,000 per plan while the maximum limit stands at $500,000 per plan. If the employee benefit plan includes securities issued by the employer, the ERISA bond carries a maximum limit of $1,000,000.The purpose of the ERISA bond involves protecting companies from the malfeasance or incompetence of employee benefit plan administrators. If the evidence shows that the plan manager mishandled employee benefit plan funds, and if the plan manager cannot compensate the company for plan losses, the ERISA bond repays some or all of the mismanaged funds.
Although many insurance companies sell ERISA bonds, these securities do not function like insurance. Instead, they act as a security against mismanagement from plan managers. If the damages to the plan exceed the amount of the ERISA bond, the company must make up the difference. For instance, if the plan manager sells off company stock held in the plan for $2.5 million and pockets the proceeds, the ERISA bond covers the first $1 million and the company must make up the remaining $1.5 million.
Any individual who can put an employee benefit plan at risk from mishandling of funds must be bonded. The ERISA statute does not call for plan sponsors to purchase bonds for service providers outside the company structure, but companies typically buy ERISA bonds for fiduciaries and employees who manage benefit plans.