The Employee Retirement Income Security Act is a federal law enacted in 1974. ERISA has set minimum standards for planning administrators and investment advisers to protect employee health and pension plans in the private sector.
The U.S. Department of Labor explained that ERISA requires officials of the plan to manage, supervise, propose, or process other funds or assets of an employee welfare plan that must be covered by a personal loyalty relationship. If a program official commits fraudulent or un honest acts, his bond ensures that the pension fund or health fund can recover some of its losses. Bonds only pay if the fraud manager cannot afford to meet his obligations.
According to the Labor Department, a planning official must be deposited at least 10 percent of the amount he handles, with a minimum bond amount of $1,000. The maximum bond amount is $500,000 per pack. However, if the employer’s plan to invest in securities, such as company shares, then the maximum bond amount is $1,000,000. You can buy ERISA bonds from most major insurers, and the average annual premium is $200 per year or less.
ERISA bonds are not insurance. If an administrator or investment adviser causes damage, for example, $2 million, the bond will only pay for the plan up to $500,000.
Although not as comprehensive as insurance, ERISA bonds offer some level of protection against fraud. Bonds also protect holders if they accidentally violate ERISA rules.