YOU ASK:

Is obtaining ERISA bonds required of ERISA fiduciaries by law?

WE ANSWER:

Yes, every ERISA fiduciary is required by law to have an ERISA bond delimiting the funds investment advisers can manage under a qualified employee benefit or a retirement plan to a maximum of $500,000. The reality is that there are still financial advisers who do not know about this regulation and therefore, do not have the ERISA bond.

Financial advisers acting as ERISA fiduciaries must distinguish between ERISA bonds and, say, financial institution bonds such as Fidelity bonds. The former can be purchased separately from the latter, with the ERISA plan, not the institution, acting as the insured.

How ERISA Bonding Works

First of all, it is important to clarify what an ERISA plan is. It is a plan that is subject to ERISA, or The Employee Retirement Income Security Act, which was enacted in 1974 to ensure the security of participants in employee pension plans.

Only qualified retirement employee plans are subject to ERISA regulations. Non-qualified plans, IRAs and governmental plans do not count as ERISA plans.

The bonding requirement is contained in Section 412 of ERISA, providing that: "every fiduciary of an employee benefit plan and every person who handles funds or other property of such a plan shall be bonded against fraud and dishonesty by its employees or the entity." The "fraud and dishonesty" refer to any misuse and mismanagement of the participants' funds under an employee retirement plan.

In order to be eligible to manage employee retirement plans and make investment decisions on behalf of the participants, a financial adviser must have this ERISA bond. Under ERISA, Section 412.a, each fiduciary is required to obtain a bond amounting to 10 percent of the respective plan's funds, but not exceeding $500,000.

If an investment adviser has only a few ERISA clients, they should purchase individual bonds. Advisers with a lot of ERISA clients will be better off obtaining a blanket ERISA bond, instead. The process of ERISA bond underwriting is easy, premiums are competitive and every new ERISA client is automatically covered under an ERISA bond.

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