The Employee Retirement Income Security Act is a federal law enacted in 1974. ERISA established minimum standards for plan administrators and investment advisers to protect employee pension and health plans in the private sector.
ERISA requires that plan officials who manage, oversee, recommend or handle funds or other property of an employee benefit plan must be covered by a personal fidelity bond, the U.S. Department of Labor explains. If a plan official commits fraudulent or dishonest acts, his bond ensures that the pension or health fund can recover some of its losses. The bond only pays if the fraudulent administrator is financially unable to meet his obligations.
A plan official must be bonded for at least 10 percent of the funds he handles, with a minimum bond amount of $1,000, according to the Department of Labor. The maximum bond amount is $500,000 per plan. However, if the plan invests in employer securities, such as company shares, the maximum bond amount is $1,000,000. You can purchase an ERISA bond from most major insurance companies, and annual premiums average $200 per year or less.
ERISA bonds are not insurance. If an administrator or investment adviser causes damages of, say, $2 million, the bond would only pay the plan a maximum of $500,000.
While not as comprehensive as insurance, ERISA bonds provide some degree of protection against fraud. Bonds also protect their holders if they inadvertently break ERISA rules.