An ERISA bond — often called a fidelity bond — is a form of insurance required under the Employee Retirement Income Security Act of 1974 (ERISA). The bond protects employee benefit plans against losses caused by fraud or dishonesty by individuals who handle plan funds or property. It is not a bond guaranteeing plan performance; rather, it is a financial backstop if money or assets are stolen or misapplied.

Fidelity bonds are a risk-transfer tool for fiduciary and non-fiduciary employees, and for third-party administrators who have access to plan assets. The Department of Labor (DOL) enforces ERISA’s fidelity bonding rules and can take enforcement action when plans fail to maintain required coverage.

ERISA requires that every person who "handles" funds or other property of an employee benefit plan be bonded. "Handle" generally means having physical control or custody of plan funds or property or exercising discretion over them — for example, collecting contributions, writing checks, processing distributions, maintaining plan accounts, or making investments.

Covered individuals typically include plan trustees, administrators, accountants, payroll clerks, and certain third-party service providers who have direct access to plan assets. Brokers or advisers who only provide investment advice without control over assets usually are not considered to be handling funds, though documentation of roles and responsibilities helps clarify obligations.

Common examples of people who should be bonded

Examples include in-house payroll personnel who deposit employee contributions, human resources staff who process plan loans or distributions, corporate officers who sign plan checks, and third-party administrators that process benefit payments. Any person who can remove or convert plan assets in the ordinary course of plan operations typically needs a bond.

Who is exempt?

Certain persons and entities are exempt from the bonding requirement. For example, banks, trust companies, and similar entities that are already subject to federal or state insurance, examination, or supervision may be exempt when they handle plan assets in their role as custodians or trustees. Also, persons who have no access to funds or property — such as individuals who only give investment advice without control — generally do not need bonding.

ERISA sets a specific formula for the minimum required bond amount: the bond must equal at least 10% of the amount of funds handled, subject to a minimum and maximum. The minimum bond amount is $1,000. The maximum bond amount is generally $500,000 per plan, but it increases to $1,000,000 for plans that hold employer securities.               

In practical terms, that means the required bond is the greatest of: (1) 10% of the amount of plan funds handled by the person bonded, (2) $1,000, or (3) any higher amount fixed by a plan’s terms. However, the required bond cannot exceed $500,000 (or $1,000,000 for plans that invest in employer securities).

Example calculation

If an HR manager handles $200,000 in plan assets, the required bond is 10% of that amount = $20,000, which exceeds the $1,000 minimum and is well below the $500,000 cap. If a plan trustee handles $6 million in assets, 10% equals $600,000, but the ERISA cap limits the required bond to $500,000 unless the plan holds employer securities — then the cap would be $1,000,000.

An ERISA fidelity bond covers losses caused by acts like theft, embezzlement, forgery, and dishonest acts by bonded individuals. Typical covered losses include missing funds, unauthorized transfers, fraudulent claims for benefit payments, and similar breaches of trust that result in a loss to the plan.

The bond does not replace fiduciary liability insurance. Fiduciary liability insurance covers claims alleging breaches of fiduciary duties (for example, imprudent investments or failure to follow plan terms). A fidelity bond covers only those losses resulting from dishonest acts. Additionally, the bond does not cover losses resulting from poor investment performance, negligence, or mistakes if those acts are not dishonest.

Claims process

When a suspected dishonest act occurs, plans typically conduct an internal review to confirm losses and gather documentation. The insurer that issued the fidelity bond must be notified promptly. The insurer will investigate and, if the claim is valid under policy terms, compensate the plan up to the policy limit. Prompt notification and cooperation in the insurer’s investigation are crucial to preserve coverage.

Coordination with other remedies

ERISA’s civil enforcement remedies remain available in addition to bond claims. The plan may pursue recovery from the wrongdoer directly, and the Department of Labor may seek restoration of losses or other remedies. A proper bond claim will not prevent a plan from pursuing additional legal remedies against responsible parties.

Bond premiums vary with the amount of coverage required, the risk profile of the bonded individuals, the plan’s history, and the insurer’s underwriting standards. Typical premium rates for fidelity bonds often fall in a range from roughly 0.5% to 3% of the bond amount annually, although rates can be higher or lower depending on circumstances.

Factors affecting cost include bond amount, number of individuals to be bonded, prior loss history, internal controls (segregation of duties, reconciliation procedures), corporate financial strength, and whether the bonded individuals are employees or outside vendors. Plans with robust controls and low turnover usually receive more favorable rates.

California-specific market notes

California’s insurance market is competitive, with many insurers offering fidelity products suited to employee benefit plans. Local insurers and national carriers both provide coverage, and California plan sponsors often obtain multiple quotes to compare rates and terms. Working with an insurance broker familiar with ERISA bonds can help secure competitive pricing and appropriate policy language.

Choosing the correct ERISA fidelity bond requires attention to plan operations and potential exposures. A practical checklist helps ensure compliance and adequate protection:

- Identify all persons who handle plan funds or property and determine whether they meet ERISA’s "handling" standard.

- Calculate the 10% bond requirement for each handling person and confirm the minimum/maximum limits apply.

- Review plan documents for any specific bonding requirements beyond ERISA’s minimums.

- Evaluate internal controls and segregation of duties to potentially reduce premium costs.

- Obtain multiple quotes and review policy forms for exclusions, aggregations, and claim procedures.

- Verify that the bond is issued by an insurer authorized to write fidelity coverage in California.

Policy language to review

When evaluating bond proposals, review coverage territory (should include the United States), definitions of dishonest acts, exclusions for cybercrime or social engineering, aggregate limits, per-occurrence limits, and requirements for notice of claim. Confirm that coverage is written "for the benefit of the plan" and that the plan is named as the insured beneficiary.

ERISA is a federal statute, and fidelity bonding obligations arise under federal law. However, California employers and insurers must comply with state insurance regulations and licensing requirements. Insurers issuing fidelity bonds in California must be admitted or eligible to transact business in the state and must comply with filings and financial standards set by the California Department of Insurance.

California-specific statutes generally do not alter ERISA’s bonding formulas, but employers should be aware of state rules affecting payroll, unemployment insurance, and other employment-related obligations that may intersect with plan administration. For example, payroll deductions and remittances are often subject to state audits or investigations that uncover plan handling issues, reinforcing the need for fidelity coverage and strong controls.

Working with California-regulated banks and custodians

When a plan’s assets are held by a bank, trust company, or other regulated financial institution, that entity may be exempt from bonding if it is regulated and examined by federal or state authorities. However, using a custodian does not eliminate all fiduciary responsibilities; plan fiduciaries still must prudently select and monitor custodians and service providers.

Some plans present unique bonding challenges. Multiemployer plans, multiple-employer plans (MEPs), and plans that hold employer securities require careful attention because of higher asset levels, multiple administrators, or specific transaction types. Plans with frequent loans, in-kind distributions, or self-directed brokerage windows may also create higher exposure.

Plans that hold employer securities (such as employer stock in a retirement plan) are subject to a higher maximum bond limit — $1,000,000 instead of $500,000 under ERISA. That higher cap gives some additional protection, but large plans with substantial assets often need to consider supplemental measures like internal controls, external audits, and indemnification agreements with service providers.

Third-party administrators and bundled service providers

When third-party administrators (TPAs), payroll vendors, or recordkeepers handle plan funds, the plan sponsor should confirm whether those vendors maintain their own fidelity bonds that cover the plan. It is prudent to require proof of coverage, obtain copies of policies or certificates, and negotiate contractual obligations that clarify the vendor’s responsibility for losses caused by its employees.

Failing to maintain required bonds, incorrectly calculating bond amounts, or misunderstanding who must be bonded are common compliance mistakes. These pitfalls can expose plans to uncovered losses, regulatory penalties, and litigation. Addressing these issues proactively reduces risk and establishes a strong compliance posture.

Common mistakes include: relying on vendor representations without documented proof of coverage, overlooking employees who occasionally handle plan funds (such as temporary staff), and misinterpreting the definition of "handling" for individuals who exercise indirect control over plan assets.

Practical steps to prevent problems

Adopt an annual review process to inventory persons who handle plan assets, update the bond as assets increase or personnel change, and request updated certificates from vendors. Document internal controls, maintain segregation of duties where possible, and ensure reconciliations and independent reviews are performed regularly.

If a suspected dishonest act is discovered, prompt and methodical action is crucial to protect plan assets and preserve claim rights under the fidelity bond. Immediate steps include containing the loss, documenting the incident, notifying legal counsel, and informing the insurer and relevant regulators as required.

Preserving evidence — including transaction records, employee access logs, and communications — helps the insurer’s investigation and any potential recovery efforts. Meanwhile, plan fiduciaries must take steps to restore losses to the plan as required by ERISA and to prevent recurrence through strengthened controls.

Regulatory notifications and potential enforcement

Depending on the facts, notification to the Department of Labor may be necessary, particularly if the loss is substantial or systemic. The DOL has authority to pursue civil enforcement, obtain restoration of plan assets, and seek other remedies. Cooperation with the DOL and the insurer during investigations tends to produce more favorable outcomes for plans.

Fidelity bonds protect the financial integrity of employee benefit plans, safeguard participant interests, and help maintain trust between employers, employees, and service providers. Beyond satisfying a legal requirement, an appropriate bond is a risk management tool that can signal good governance to auditors, regulators, and plan participants.

Strong bonding and internal controls contribute to plan stability and resilience. In larger plans, bonds alone may not cover all risks, but combined with fiduciary insurance, audits, and prudent governance practices, they form part of a comprehensive protection strategy that reduces the likelihood of loss and helps ensure prompt recovery if an incident occurs.

Covered here are concise answers to frequent questions that arise for California plan sponsors and administrators regarding ERISA bonding obligations.

Is the plan administrator the only person who must be bonded?

No. Any person who handles plan funds or property must be bonded. That can include payroll personnel, trustees, certain directors, third-party administrators, and other employees or vendors who have physical custody or discretionary control over plan assets.

Can an employer’s general liability or commercial crime policy satisfy the ERISA bond requirement?

Typically, ERISA requires a specific fidelity bond for the plan. While commercial crime policies might cover similar risks, the bond must conform to ERISA requirements (10% of funds handled, minimum $1,000, caps at $500,000 or $1,000,000 as applicable). It is essential to confirm that any general policy provides coverage that meets ERISA’s statutory standards and names the plan as a beneficiary.

How often must the bond be updated?

The bond should be reviewed and potentially updated whenever plan assets increase or when personnel and vendor arrangements change. Many plans perform an annual review and update the bond to reflect the current amount of funds handled and any organizational changes.

Employers and plan sponsors should begin with an assessment of who handles plan funds and the current bond amount. Obtain proof of coverage for vendors and ensure that any bonding meets ERISA’s statutory formula. Implementing thorough internal controls and documenting procedures will reduce the likelihood of loss and may also help secure favorable bond premiums.

Engaging qualified counsel or a benefits consultant to review plan documentation, vendor contracts, and bonding arrangements is advisable, particularly for larger or more complex plans. Certified public accountants, insurance brokers specializing in employee benefits, and ERISA attorneys can provide practical guidance to ensure full compliance and appropriate protection.

ERISA fidelity bonds are a fundamental element of protecting employee benefit plans from dishonest acts. For California employers and plan administrators, understanding who must be bonded, how the bond amount is calculated, what the bond covers, and how to secure cost-effective coverage are essential tasks. Maintaining strong internal controls, documenting procedures, and conducting periodic reviews will help ensure compliance and safeguard plan assets.

While ERISA sets the federal bonding framework, California entities must operate within the state’s insurance regulatory environment and work with qualified providers to obtain appropriate coverage. Proper preparation and ongoing governance will reduce risk and support long-term plan integrity for participants and beneficiaries.