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 can secure physical possession of plan funds.
• They have the potential ability to transfer plan funds to themselves or to third parties.

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, and plan sponsor employees. Fiduciaries who do not handle funds are not required to obtain an ERISA fidelity bond.

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

Like other types of surety bonds, ERISA bonds cost a small percentage of the bonded amount. Typically, the amount bonded is 10% of the funds that 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 that have 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.

The cost of each bond is based on the covered individual’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. It considers factors like credit score, business documents, and assets and liquidity. Bonds typically are more expensive for parties that have 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.

ERISA fidelity bonds can be written for a term of at least one year. Bonds that cover multiple years typically contain an “inflation guard” provision. Their coverage amounts automatically satisfy ERISA each year, regardless of inflation and plan growth.

ERISA fidelity bonds must meet the substantive requirements of ERISA section 412 and the appropriate regulations for the persons and plans involved. Only bonds obtained from a surety or reinsurer named on the Department of the Treasury’s Listing of Approved Sureties, Department Circular 570 (available on the Bureau of the Fiscal Service website), or in some cases from underwriters at Lloyds of London, are allowable under the law.

Neither the plan nor any interested party is permitted to have any control or significant financial interest (directly or indirectly) in any surety, reinsurer, agent, or broker through which the bond is obtained.

Plans may meet their ERISA fidelity bond requirements using several different types of bond forms, including the following:

• Individual Bonds
• Name schedule – Covering the listed individuals
• Position schedule – Covering each of the job position listed in the schedule
• Blanket – Covering all officers and employees of the insured generally

Discussing your options with an experienced financial professional can help you reduce the cost of bonding while ensuring your plan protects its assets and meets its obligations.