If you have ever administered a 401k, are a fiduciary of a pension plan, or own a company that offers a retirement plan to your employees, you have probably heard of an ERISA bond. Nevertheless, the true importance of this seemingly insignificant policy is drastically underestimated, even by financial professionals.
Although it is important to know about the history of ERISA bonding, this article will focus on how the most common use of these bonds allows the Department of Labor easy access to personal and corporate financial information.
What is ERISA?
The Employee Retirement Income Security Act of 1974 (ERISA) stipulates the regulations for fiduciaries of covered employee benefit plans, such as 401k's. These laws are intended to protect the plan assets from theft and fraud from those who are responsible for them. Part of that protection is a mandated fidelity bond that is required to cover at least 10% of the plan assets up to a maximum of $500,000 (there are some exceptional circumstances that raise that limit to $1,000,000, for example, if the plan holds its own securities). Generally, that is a good thing, since it protects employees by reimbursing them in the event of theft and/or fraud.
Problems and Solutions
Ensuring that insurance plans are compliant with the law may generate a variety of problems. More often than not, these issues stem from the ERISA bond. There are three main problems with the way ERISA Bond purchasing is currently handled:
Problem #1: Purchasing the bond
The primary problem arises when the bond is purchased. Although there is a standard bond purchasing procedure, it often exposes the bond holder to unwanted and invasive scrutiny.
Here's how:
Generally, your plan administrator will inform you that you need an ERISA Fidelity bond appended to your 401k once you have the plan, and advise that your insurance agent can arrange it for you. Insurance agents tend to add the ERISA bond as a rider to your corporate criminal policy, which can compromise your privacy. If the Department of Labor decides to investigate you, the easiest thing for them to inquire about is if you are compliant with your bond. ERISA law prohibits the applications of deductibles to bonds. This allows the Department of Labor to access your entire corporate policy without having to force an audit.
SOLUTION #1: a stand alone policy for the bond
Problem #2: Bond Term
A rider usually covers you for only one year. Therefore, you have to amend the rider every year to ensure that you are covered. Unfortunately this requirement is often overlooked by actuaries and/or administrators.
SOLUTION #2: a three-year stand alone policy
Problem #3: Compliance with the law
Once you have a three-year stand alone policy there is still one more potential problem. ERISA law mandates that you have at least 10% of your plan covered. For example, a plan worth one million dollars requires a bond that covers one-hundred thousand dollars. However, if your plan performs well and grows, but you fail to increase your minimum coverage, you will no longer be compliant with the law!
SOLUTION #3: purchase THE RIGHT POLICY
Simple recommendations:
Purchase a three-year stand alone policy with an "inflation guard" that automatically adjusts to plan growth up to 10%. Bleier Insurance Group provides simple, fast and efficient service into the future, helping you buy the right bond, protecting your personal and corporate privacy, and ensuring compliance with the law.
Speak to your Bleier Insurance Group representative today!
