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Explanation Of The ERISA Bond

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The Purpose Of An ERISA Bond

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An ERISA bond originates from a federal law passed in 1974. The Employee Retirement Income Security Act created standards that financial advisers had to follow when managing private pension funds and health care plans. The officials in charge of such plans must be covered by ERISA bonds, which will financially cover losses in case the officials commit fraudulent acts or otherwise engage in unethical behavior with the funds in these accounts.

The Qualities Of An ERISA Bond

ERISA officials must pay for their own bonds or arrange for their payment some other way. They can buy them from most major insurance companies. The premiums on these bonds depend on the region and the seller. Generally, they cost around $200 per year.

An ERISA bond must possess coverage for a certain amount of money in comparison to the size of the fund handled by the covered official.  The minimum amount permitted is ten percent of the total fund. This can result in coverage of no less than $1,000. Depending on the exact type of fund handled by the ERISA official, the maximum limit of the bond is either $500,000 or one million dollars. The latter amount is the maximum for plans, which invest in employer securities.

Contributors to plans covered by an ERISA bond should remember that these bonds are not forms of insurance. If an official mishandles several million dollars and loses it all, his or her bond will only pay its stated amount. The purpose of the bond is not simply to protect the contributors. It also protects the official from possible prosecution that may be threatened after an act of carelessness rather than criminal intent. An ERISA bond is also a way to protect contributors to pension plans from fraud.

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