ERISA established fiduciary responsibilities for those who manage and control retirement plan assets. These are specific standards of conduct that require each individual (“fiduciary”) to act in the best interests of the plan (the “principal” or “beneficiary”) rather than their own interest. A fiduciary handles money or other assets (i.e., retirement funds) for others.

According to the Department of Labor, “the primary responsibility of fiduciaries is to run the plan solely in the interest of participants and beneficiaries and for the exclusive purpose of providing benefits and paying plan expenses.”

A Surety Bond to Protect Retirement Funds

Because plan administrators have significant power over employees’ retirement funds, ERISA does not rely on good faith to ensure that fiduciaries fulfill these duties. Instead, it requires that plan administrators with fiduciary duties obtain surety bonds.

1. Anyone Who Manages Employee Benefit Plans

Any individual who manages or handles funds, property, or other assets in employee benefit plans, including pensions, must obtain a first-party ERISA fidelity bond. A person fits this description if they fall into any of these categories:

• They have physical contact with checks, cash, or other similar property.
• They have physical contact with checks, cash, or other similar property.
• They can secure physical possession of plan funds.
• They have the potential ability to transfer plan funds to themselves or to third parties.

2. Anyone Who Handles the Supervision of Plan Funds

It also applies to individuals who supervise the handling of plan funds. Typically, this group includes:

• Plan trustees
  
• Plan sponsors
  
• Plan administrators
  
• Members of a plan’s investment committee
• Plan employees
  
• Plan sponsor employees

3. Outside Providers

Sometimes, plans will outsource some of their plan maintenance or investment functions. Some outside providers must be bonded under ERISA bond requirements, but others are exempt. The plan fiduciaries are responsible for accurately determining what bonding is necessary and ensuring that external service providers are properly bonded. Obtaining “third-party” ERISA bonds covering these contractors may be necessary.

Determining Your Bond Amount

Like other types of surety bonds, ERISA bonds cost a small percentage of the bonded amount. Typically, the bond amount is 10% of the funds an official handles, with a minimum of $1,000 and a maximum of $500,000 (or $1,000,000 for plans that include employer-sponsored securities like company stock or bonds).

This guideline applies to plans with mostly “qualifying” assets (funds in bank accounts, mutual funds, products, and insurance policies). For plans that hold more than 5% of their value in “non-qualifying assets” (e.g., real estate, fine art, collectibles, etc.), the bonds must be written for 10% of the total value of the plan’s assets or for the value of all non-qualifying assets – whichever is greater.

Calculating Bond Cost

Typically, the cost of the bond will be a small percentage of the bond amount. The cost of each bond is based on the applicant’s credit history and personal and business finances. The issuer of the bond – the surety – determines the cost by assessing the level of risk involved in the bonding. The surety considers factors like credit score, business documents, assets, and liquidity.

Bonds typically are more expensive for parties with less favorable credit.
Because ERISA fidelity bonds protect the plan and its assets, the plan is permitted (but not required) to pay for their cost.