All About ERISA Bonds: What Every Plan Sponsor Should Know

If your business offers a 401(k) or another retirement plan, you have taken on a legal responsibility along with the employee benefit: retirement plans are regulated by the high standards of the Employee Retirement Income Security Act (ERISA). One piece of the sponsorship responsibility is obtaining–and maintaining–an ERISA fidelity bond. It’s not expensive, but it is mandatory, and it’s one of the requirements small and mid-size plans most often miss. Here’s what plan sponsors need to know about ERISA bonds. 

What is an ERISA bond?

Section 412 of the Employee Retirement Income Security Act requires ERISA requires anyone who “handles” plan funds to be bonded, and this is a term the Department of Labor reads broadly: anyone with authority to move, disburse, or direct plan money usually counts. There are narrow exceptions for certain regulated banks, insurers, and broker-dealers.

Basically, an ERISA bond protects the retirement plan if someone who handles its money steals or misuses it. Think embezzlement, forgery, or someone with access quietly redirecting contributions. The plan is named insured on the ERISA bond. The “principal” on the bond is the person obtaining it. 

In the event of an act of fraud or dishonesty, the plan files a claim against the ERISA bond, and the surety that wrote the bond reimburses the plan, up to the bond amount. This money goes back to participants’ accounts, not to the business. The surety can then seek to be made whole by the bond holder. 

For more, see ERISA Bonds Explained: Five Facts.

What Is The Amount of An ERISA Bond?

The amount of an ERISA bond follows a formula. Each person who handles plan money must be bonded for at least 10% of what they handled in the prior plan year, and never less than $1,000. The required amount tops out at $500,000 per plan (1,000,000 if the plan holds employer stock), though a plan may choose to buy more. If your plan has $1.2 million and one person handles all of it, that person needs at least $120,000 in coverage.

The bond must come from a surety on the U.S. Treasury’s Listing of Approved Sureties (Circular 570). The DOL’s own ERISA fidelity bond guide further details the basics of bonding. 

What happens if you don’t comply?

For retirement plan sponsors, the problem of noncompliance with ERISA bonds usually surfaces on paper first. Your annual Form 5500 asks whether the plan was bonded and for how much. A “no,” or an amount below the 10% threshold, is an easy flag for regulators and can lead to an audit or investigation.

ERISA makes it unlawful to handle plan money without proper bonding, and also unlawful for a plan official to allow someone else to do so. The DOL has named sponsors in lawsuits where a missing bond was part of a broader pattern of neglect, as we covered in Failure to Obtain ERISA Bond?

Another big risk is timing. If money “disappears” while the plan is unbonded, there is nothing to make participants whole, and fiduciaries can be held personally responsible for losses tied to their breach. For more, see: The Importance of ERISA Bonds.

Theft or Fraud Vs an Error or Oversight? 

An ERISA bond essentially answers one question: how are participants made whole if someone steals from the plan? It doesn’t answer the more common problem retirement plan sponsors have: what if they make a mistake fulfilling their oversight duties? 

ERISA holds plan fiduciaries to some of the highest standards in the law. You’re expected to act solely in participants’ interest, with the care and skill of a prudent person. Fall short, and you can be personally liable for the resulting losses in the event of a lawsuit, or penalties alleging errors and oversights in your stewardship of the plan.  Personal liability means your own assets, (not just the company’s) are at risk. 

Most claims against retirement plan sponsors have nothing to do with bad intent. They start with ordinary oversights: employee deferrals deposited late, fees nobody benchmarked, a lagging fund kept in the lineup too long, or a service provider no one was monitoring. None of these involve dishonesty, so the bond won’t respond. And legal fees can pile up long before anyone decides whether you actually did anything wrong.

Fiduciary liability insurance fills that gap. It covers your legal defense and potential penalties if you’re accused of breaching your duties. While an ERISA bond protects the plan from theft, fiduciary insurance protects you from the consequences of mistakes. For further insights on why it is essential for retirement plan sponsors to be both bond compliant and personally protected, check out our prior blog post: ERISA Bond and Fiduciary Liability Insurance? 

Why cyber coverage belongs in the same conversation

Retirement plans hold exactly what criminals want: money, Social Security numbers, and account access. The DOL has confirmed its cybersecurity guidance applies to all ERISA plans. That guidance expects fiduciaries to choose and monitor service providers with strong security practices.

So a phishing scheme that reroutes a distribution, or a recordkeeper breach you never asked questions about, can turn into a fiduciary breach claim against you. That’s why Colonial Surety Company’s fiduciary liability insurance includes cyber liability coverage at no extra cost. The cyber coverage provides expert breach response and defense against related lawsuits and regulatory actions. Learn more here: Personally Responsible?

To Do List: Bond Compliance and Personal Coverage 

Here’s a 15-minute check list to help all retirement plan sponsors remain ERISA Bond compliant and personally protected as fiduciaries. 

• Compare last year’s Form 5500 bond amount to 10% of plan assets.
• Confirm the plan is named as the insured and the surety appears on Circular 570.
• List everyone who can move plan money, including outside administrators, and confirm each is covered.
• Consider a multi-year term or an inflation guard so coverage keeps pace with growth. See Adequate ERISA Bond?
• Ask whether you’d be personally covered if a participant sued tomorrow. If the answer is no, add fiduciary liability insurance with cyber protection.

Protect the Plan, Your Business, and Yourself in One Step

Colonial Surety Company’s ERISA Protection Package pairs three coverages in one affordable and efficient purchase:

• The DOL-required ERISA bond for the plan
• Fiduciary Liability Insurance for the sponsor, with up to $1,000,000 for defense and penalties
• Cyber Liability coverage for your business and plan, with $50,0000 included at no extra cost

Get a quote, pay, and download proof of coverage in minutes.

Get Your ERISA Protection Package →

Questions? Our knowledgeable, New Jersey-based ERISA team is available Monday through Friday, 8:30 a.m. to 5:30 p.m. ET, at 888-383-3313 or erisadept@colonialsurety.com.

As an A.M. Best “A (Excellent)” rated, U.S. Treasury-listed surety licensed in all 50 states — and rated 4.8 on Trustpilot — Colonial Surety Company makes it simple to get every layer of protection in place, without piecing it together from multiple sources.