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 Bond. 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.