The Employee Retirement Income Security Act (ERISA) of 1974 was initially enacted to protect employees from being defrauded of their pension funds. While instances of fraud have been rare, the Department of Labor has moved to monitor small company pension plans more closely, requiring ERISA bonds for all 401(K) pension plans with very few exceptions. Even company plans with fewer than 100 participants are affected. The new regulations from the Pension and Welfare Benefits Administration of the Department of Labor impact benefit plans that were previously exempt from annual audits under §29200.104-46 and ERISA §103(d). As of April 17, 2001, pension plans with even 5% of assets held outside a bank or financial institution must be insured by an ERISA bond. The exemption is still in place for plans that are fully funded through the general assets of the sponsor. Otherwise, an ERISA bond must be obtained for the plan to be in compliance. ERISA bonds serve a different function than errors and omissions insurance. ERISA bonds cover claims involving dishonest acts on the part of the employer or third party administrators. Because they cover against losses due to criminal activity, errors and omissions coverage is not a substitute for an ERISA bond.

The dollar amount of the ERISA bond required for a 401(K) plan to be in compliance depends on the types of assets in the individual plan. Some assets, such as loans or assets held by a bank, insurance company or financial institution, are called "qualifying assets". Other assets, including real estate not held in a trust, are considered non-qualifying assets and require additional bonding. The final regulations, which include a definition of qualifying assets, can be accessed over the Internet at www.BenefitsLink.com.

An obstacle to keeping a pension plan in compliance is finding a company willing to write ERISA bonds. The premiums are so low that many companies decline to issue them. Colonial Surety Company has taken the challenge by providing easy to obtain ERISA bonds over the Internet on their secure website, www.colonialsurety.com.

Colonial Surety Company also offers a "bond coverage calculator" on their website. This calculator is used to determine the amount of bonding required to put a plan in compliance. By entering the total assets of the plan, the "qualifying assets", the estimated total amount of annual contributions, estimated annual employee distributions, and the projected annual rate of return, the calculator can compute the recommended amount of bonding. ERISA bonds from Colonial Surety are available for one year and five-year bond terms. A five-year bond from Colonial Surety Company costs about the same as a three-year bond from anyone else. Once the amount and length of the bond is decided, the bond application may be submitted directly from the website.