erisa bonds - investment related

An ERISA bond for an investment advisor is a specially underwritten bond that is required of all ERISA fiduciaries. A little known provision in the ERISA code requires registered investment advisors to maintain an ERISA bond for the benefit of ERISA regulated plans such as employee benefit or pension plans, including 401k's, as other fiduciaries may be required to carry.

The investment advisor is required to have this bond with limits of a percentage of assets under management, up to a maximum of $500,000, for each qualifying plan. Some advisors do not have this bond, and don't even know it is required.

ERISA bonds are not the same as, and must be purchased separately from, investment advisor financial institution bonds (Fidelity/Crime Bonds). Unlike the financial institution bond, the ERISA plan is the insured for the ERISA bond.

ERISA

The Employee Retirement Income Security Act of 1974 (ERISA) is a federal law that sets minimum standards for most voluntarily established pension and health plans in private industry to provide certain protections for individuals in these plans. ERISA protects the plan's assets by requiring that those persons or entities who exercise discretionary control or authority over plan management or plan assets, anyone with discretionary authority or responsibility for the administration of a plan, or anyone who provides investment advice to a plan for compensation or has any authority or responsibility to do so are subject to certain fiduciary responsibilities.

Bonding for ERISA Plans

One of the elements of ERISA that directly affects the investment community is the bonding requirement spelled out in Section 412. This section requires 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 or dishonesty by its employees or the entity. The term "fraud or dishonesty" includes such events as larceny, theft, embezzlement, forgery, misappropriation, wrongful abstraction, wrongful conversion, willful misapplication or any other fraudulent or dishonest acts.

An investment advisor who has the "right" or power to make investment decisions for ERISA plans must be bonded. Section 412(a) of the Employee Retirement Income Security Act of 1974 (ERISA), requires that a bond be obtained for 10% of each plan's assets under management subject to a maximum limit per plan of $500,000 and a minimum bond amount of $1,000 per plan. The amount of the bond shall be fixed at the beginning of each fiscal year of the plan.

Plans

Here are examples of the types of plans that are subject to ERISA and require a fiduciary to be bonded per Section 412 of ERISA:

• Defined Benefit Pension Plans, Money Purchase Pension Plans, Profit Sharing Plans, 401 (K) plans, stock bonus plans, employee stock ownership plans (ESOPs) and Keogh or H.R. 10 plans that have employee participants.


• Employer-sponsored welfare plan trust funds exempt from federal income tax under Internal Revenue Code Section 501(c) (9) (VEBAs).


• Employer-sponsored Simplified Employee Pension (SEP) plans and group IRA's that are sponsored by an employer or employee association.


• Simple IRA plans


• Union-sponsored plans of the types listed above.


• Plans established under IRS Code Section 457 that provide deferred compensation arrangements for employees of certain non-government tax exempt organizations.


• Employer-sponsored deferred compensation plans not qualified for federal income tax exemption, including "secular" trust, Section 402 (b) trusts, and funded excess benefit plans.


• Plans established under IRS Code 403 (b) that are employee benefit plans under ERISA either because the employer contributes to the program or because the employer has more than limited involvement in administration of the program.

Exposure & Underwriting

ERISA bonds have historically had little exposure, and therefore the underwriting is relatively simple and the pricing reasonable relative to investment-related professional liability coverages. In order to underwrite these bonds the insurance carriers will require a sample investment management agreement to determine whether or not the investment advisor maintains custody of the assets. As long as the advisor does not have custodial authority over the assets of the invested plans, they can qualify for minimal rates and special ERISA bond programs.

In addition to the management agreement, the carriers require the following information from each managed plan:

  • Name of Plan
  • City/State where the plan is located
  • Type of Plan
  • Assets under management

For advisers with numerous ERISA clients, a blanket ERISA bond makes the most sense as it covers the firm for all ERISA clients. Individual bonds can be obtained for advisers with only a few ERISA clients. Premiums are competitively priced and you receive automatic coverage for all new clients added during the year at no additional premium.

What do we need?  A thorough submission is necessary to get the job done.  In addition to the application, the submission should include a clear description of the activities and five years of loss history. We would recommend a conversation with a Tennant broker prior to starting the process. 

Tennant Risk Services provides ERISA bonds for investment advisors and other ERISA investment professionals. Please let us know your client's needs and we will provide you with information and assistance with your particular situation or account, and an ERISA bond.

Tennant Risk Services is a professional liability specialist and has built a significant practice in its investment related professional liability focus area, including investment advisors, private equity and hedge funds, trustee liability and other investment professionals.  Our goal is to provide the best combination of product, price and service to you.  We will handle your accounts knowledgeably and efficiently, in turn saving you valuable time and money.  Please let us know if we can be helpful in any way.

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124 LaSalle Road
West Hartford, CT 06107
Phone: (860) 519-1301
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E-Mail: info@tennant.com

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