Benefit plan administrators, TPAs, registered investment advisors and plan sponsors often question the requirement for an ERISA fidelity bond that protects plan assets from dishonest conduct. So, we offer a brief ERISA fidelity bond explanation. The historical trigger that led Congress to institute a fidelity bond requirement under ERISA (Employee Retirement Income Security Act of 1974) was the discovery of widespread mismanagement and corruption in private pension funds, particularly the Teamsters Union’s Central States Pension Fund.

Key Events Leading to ERISA’s Fidelity Bonding Requirement:

  1. Teamsters Pension Fund Scandals (1950s-1970s)
    • The Central States Pension Fund, controlled by the Teamsters Union, became notorious for misuse of funds, conflicts of interest, and links to organized crime.
    • Funds were invested in high-risk or fraudulent ventures, including loans to Mafia-controlled businesses and real estate projects that benefited union officials.
  2. Senate and Congressional Investigations (1960s-1970s)
    • Investigations, including those led by Senator John L. McClellan and later Senator Edward Kennedy, revealed massive financial mismanagement in pension funds across the U.S.
    • The U.S. Department of Labor and the Justice Department documented numerous cases where pension trustees used funds for personal gain.
  3. Studebaker Pension Collapse (1963)
    • The Studebaker Corporation, a major automobile manufacturer, went bankrupt, leaving thousands of workers without their promised pensions.
    • This high-profile collapse highlighted the lack of federal oversight and protections for private pension funds.

Congressional Response: ERISA and the Fidelity Bond Requirement

To address these abuses and protect employee retirement savings, Congress passed ERISA in 1974, which established fiduciary standards for pension fund managers and required fidelity bonding to protect against fraud and dishonesty.

  • ERISA Section 412 mandates that anyone who handles funds or property of an employee benefit plan must be covered by a fidelity bond.
  • The bond must be equal to at least 10% of the plan’s assets, with a maximum requirement of $500,000 (or $1 million for plans holding employer securities).
  • The goal was to ensure that fiduciaries and administrators had financial backing in case of fraud, embezzlement, or theft.

The fidelity bonding requirement remains a cornerstone of ERISA’s safeguards, ensuring that employee retirement funds are protected from internal corruption and financial misconduct. Surety One, Inc. is a specialist in this particular class of the surety business. Non-qualified asset plans, retro-dating of ERISA bond coverage and other non-standard scenarios are challenges that we regularly address. Reach out to any of our knowledgeable underwriters for a conversation about your particular need.