Investment Advisers, ERISA Accounts and the Department of Labor
May 19, 2010
By P. Noble Powell, Senior Vice President, Willis of Maryland

By now we are all familiar with at least the term, if not the intent of The Employee Retirement Income Security Act of 1974. ERISA sets requirements on the fiduciaries of employee benefit plans to carry out proper "duty of care" for which they are personally liable for damages caused by any breaches of their duties. The bonding provision states that those who handle funds or other property of employee benefit plans must be bonded against any dishonest acts. The bond must be placed with a reputable surety for not less than 10% of the plan's funds or $1,000 nor more than a $500,000 per plan. The adviser should note that the client's plan fiduciary might in fact require a higher limit than required by ERISA.

The exceptions to Section 412 of ERISA are given to regulated banks and trust companies with capital in excess of $1,000,000 and to union officials whose plan benefits are paid out of the general assets of the union. These plans are not required to be bonded; however, Taft-Hartley accounts are required to post the ERISA bond. The misconception is that these accounts are like municipalities and have their own regulations. While discussing municipalities, we should note that those plans and IRA's can be covered under your bond, but are not required to be covered.

These Employee Dishonesty/ERISA Bonds can be formatted on a blanket form allowing all the plans to be listed under one bond policy. Each plan would then have its own sub-limit equal to the required limits. This type of program gives the adviser the ability to get better pricing on the bonds and also utilize an endorsement that gives automatic coverage for any new plans. Another option would include writing an aggregate bond limit from which the underlying pension plans listed would draw coverage. The aggregate would need to be increased as the enumerated underlying plans encroached upon the limit. The adviser does have the option of forgoing the bond requirement by asking their client to add them as an additional insured under the client's required ERISA bond. However, most advisers are hesitant to impose upon the new client and the advisers have tracking problems verifying that they have been added to the bond. Some clients' bonding companies will not even consider adding an adviser to the policy.

The point of frustration comes from that fact that most advisers never "handle" the funds of their clients' pension plans, yet the Dept. of Labor is still requiring compliance under Sect. 412 of ERISA. Further analysis of the exposures has brought to light the possible fraudulent usage of wire transfer authority, but this exposure is limited. Investment advisers need to recognize regardless of their specific circumstances (non-custodial plan adviser, etc.) and the apparent redundancy of bonds being issued, that each plan must be bonded by everyone who "handles" the plan until that time when the ruling is modified.