ERISA bonds and fidelity bonds both protect a business against actions of employees that may come back to hurt the company. An ERISA bond covers employees who manage or have fiduciary responsibility for the company's retirement fund. A fidelity bond covers employees who may not be able to receive a bond due to concerns with their personal background or employment history. In most cases, ERISA bonds are required by law for employees who have administrative access to the retirement fund, but fidelity bonds are not required.
ERISA bonds are required to cover the person administrating a business's plan. Fidelity bonds aren't required, but they offer protection against bad employee behavior.
The Basics of ERISA Bonds
ERISA is an acronym for the Employee Retirement Income Security Act of 1974, which was put into place to safeguard employee retirement plans. According to ERISA, a company must have a bond amounting to no less than 10 percent of the value of the plan, up to a maximum bond amount of $500,000 on every employee who handles the retirement plan. This bond protects the plan from acts of dishonesty or fraud by those who administer the plan.
Fidelity Liability Insurance
Companies often purchase fidelity insurance in addition to an ERISA bond, to protect the assets of the company's retirement plan against an employee's actions that inadvertently may cause harm to the plan's assets. In such cases, an employee acting in good faith may misinterpret regulations overseeing the retirement plan, which may result in penalties or fees being assessed to the plan. Because these acts were taken in good faith and are not acts of dishonesty or fraud, they are not covered under an ERISA bond.
What is a Fidelity Bond?
A fidelity bond also protects a company from fraudulent activities of its employees, but is not specifically related to the company's retirement plan. It's a type of insurance policy that a company purchases to protect against internal losses such as theft of cash or other assets.
This bond can protect against losses of up to $25,000, and gives the company assurance from the employee's first day on the job that their risk of hiring an employee is minimized. These bonds typically expire after six months, but they can be renewed.
What Does a Fidelity Bond Cover?
A fidelity bond purchased on an employee provides 100 percent coverage with no deductible in the event that the company needs to file a claim. The bond is designed to cover willful acts of negligence, and does not cover employee issues arising from accidents, injuries or shoddy work by the employee. A fidelity bond does not guarantee the quality of work that the employee produces, but is in place to protect the company against an employee's dishonesty.
Bonds As 401K Insurance
One of the most popular retirement plans today is the 401(k), which serves as a great job perk as businesses try to attract top talent. Both ERISA and fidelity bonds can serve as 401(k) insurance, safeguarding an employee's retirement plan. Having ERISA and fidelity bonds protects a business, allowing its leaders to hire without concern that they're risking their plan on a bad hire.
For the employee, a retirement plan is a type of insurance in itself. Having that 401(k) insurance gives workers peace of mind while having a bond on its plan gives businesses the protection they need to offer that job perk. While fidelity bonds aren't legally required, experts do recommend them as a way to keep a business's 401(k) plan safe over the years.
Chris Baylor has been writing about various topics, focusing primarily on woodworking, since 2006. You can see his work in publications such as "Consumer's Digest," where he wrote the 2009 Best Buys for Power Tools and the 2013 Best Buys for Pressure Washers.