Its not fun to think about investment in this context, but the money we invest is often managed by very fallible humans. Our most basic expectations are that fund managers will not be crooks. Incompetent? Well, some people are just bad at what they do. But crooks? That is a different story. Sadly a story that is too often told. A recent story by Svea Herbst-Bayliss in Reuters highlights this (see link: http://www.reuters.com/article/2014/08/12/us-hedgefunds-fraud-idUSKBN0GC1UY20140812 for the full story). And because of the human propensity to err, safeguards were included in The Employee Retirement Income Security Act of 1975 (ERISA). One of the more potent controls in the act was the requirement that all fund or investment managers receive an ERISA Bonds or a personal fiduciary bond.
So, how extensive is this requirement? And which professionals need to be bonded? According to the ERISA provisions and 401k-plan-sponsor.com: Every fiduciary of a plan and anyone else (plan official) who handles or has authority to handle plan assets must be bonded. The bond must provide a direct right of access in favor of the plan in the event the insured plan official takes plan assets. The bond coverage amount must be at least 10 percent of plan as assets up to a maximum bond amount of $500,000. It is unlawful for, anyone who is required to be bonded to handle plan assets without a bond. Likewise, it is unlawful for any fiduciary to allow another plan official to handle plan assets without being properly bonded.
Though ERISA is designed to provide only minimum protections against criminal activity by fund managers, it does provide the framework for making claims against any 401k manager found to have acted in a fraudulent manner. In addition, the ERISA bond application process provides a filter against managers who have poor credit or a history of nefarious behavior.
For more information on ERISA Bonds including application, rates, etc., please contact the surety bond experts at Jurisco. One of their knowledgeable and friendly staff will happily answer any questions.