Fiduciary Issues

This lesson covers who ERISA treats as a fiduciary, the duties that role carries, how liability shifts between 3(21) and 3(38) roles, and the two safe harbors that limit fiduciary exposure: participant-directed accounts and QDIA defaults.

What Plans Does ERISA Cover?

ERISA (Employee Retirement Income Security Act of 1974) is a federal law that sets minimum standards for most voluntarily established retirement and health plans in private industry. It is enforced by the Department of Labor (DOL), not the SEC, and protects participants and beneficiaries of employer-sponsored retirement plans.

Plans covered by ERISA:

• Private employer-sponsored retirement plans (401(k), 403(b), pension plans)
• Defined benefit plans (traditional pensions)
• Defined contribution plans (401(k), profit-sharing)
• SEP IRAs and SIMPLE IRAs (when employer-sponsored)
• 403(b) coverage depends on the employer's level of involvement: a salary-reduction-only 403(b) with minimal employer involvement can fall outside ERISA under a Department of Labor safe harbor

Plans NOT covered by ERISA:

Exam Tip: Gotchas

• An ERISA plan's creditor protection is unlimited, and it comes from the statute itself. ERISA requires every pension plan to provide that benefits may not be assigned or alienated. That anti-alienation rule is what keeps a participant's 401(k) balance out of reach of creditors, with no dollar ceiling.
• A 401(k) rolled into an IRA is no longer covered by ERISA. The anti-alienation rule goes with it. Outside bankruptcy, the rollover IRA depends on state creditor-protection law rather than ERISA's federal shield. In bankruptcy, the federal exemption caps ordinary IRA contributions at $1,711,975 (April 2025 through March 2028), but amounts rolled over from an employer plan do not count toward that cap and stay fully exempt.

Who Qualifies as an ERISA Fiduciary?

ERISA recognizes fiduciaries by two different tests: appointment on paper, and conduct in practice.

What Is a Named Fiduciary?

• Every ERISA plan must be established and maintained under a written plan instrument
• That instrument names one or more fiduciaries, or sets out a procedure for identifying them
• A named fiduciary is a fiduciary because the plan document appointed that person, regardless of what that person actually does day to day

What Is a Functional Fiduciary?

ERISA also uses a functional definition of fiduciary: a person is a fiduciary based on what they do, not their title, regardless of what the plan document says. There are three separate triggers, and any one of them is enough:

Who qualifies as a functional fiduciary:

• Plan administrator
• Plan trustee
• Investment committee members
• Anyone with discretionary authority or control over plan assets
• Anyone who provides investment advice for direct or indirect compensation
• Anyone who decides how the plan is administered, such as resolving a disputed benefit claim by interpreting an ambiguous plan provision

What Is a Ministerial Function?

A ministerial function applies rules someone else already set. The person doing it makes no judgment call, so the third trigger is not met and the person is not a fiduciary for that work.

Exam Tip: Gotchas

• A named fiduciary and a functional fiduciary are different tests, and a person can be one, both, or neither. A named fiduciary is appointed on paper in the plan document. A functional fiduciary is whoever actually exercises discretion or gives paid investment advice, regardless of what the document says.
• Discretion in plan administration is its own trigger, separate from discretion over investments. A person who never touches plan assets can still be a fiduciary by deciding how the plan's terms apply. The dividing line is discretion, not subject matter: same task, judgment call makes it fiduciary, mechanical application does not.
• The compensation for investment advice can be indirect. A consultant paid through revenue sharing from the fund provider, rather than by the plan, still meets the "fee or other compensation" element. Who signs the check does not decide the question.
• Paid investment advice does not, by itself, always create fiduciary status. It creates fiduciary status only when the advice is rendered on a regular basis, under a mutual understanding that the plan will treat it as a primary basis for its investment decisions, and is individualized to the plan's needs. A single, one-time paid recommendation with no such understanding does not meet the test.

A third fiduciary role, the investment manager, is covered in the 3(21)/3(38) comparison below.

What Are the Four Core ERISA Fiduciary Duties?

1. What Is the Duty of Loyalty (Exclusive Benefit Rule)?

• Act solely in the interest of plan participants and beneficiaries
• Use plan assets exclusively for providing benefits or defraying reasonable plan expenses

2. What Is the Duty of Prudence (Prudent Expert Rule)?

• Act with the care, skill, prudence, and diligence that a prudent person acting in a like capacity and familiar with such matters would use
• This is the prudent expert rule, not the ordinary prudent person standard

Exam Tip: Gotchas

• ERISA's standard is the prudent expert rule ("familiar with such matters"), which is a higher standard than the common law prudent man rule because it assumes specialized knowledge.
• Do not confuse ERISA's prudent expert rule with the Uniform Prudent Investor Act (UPIA), which governs trustees of personal trusts, not ERISA plans.

3. What Is the Duty to Diversify?

• Diversify plan investments to minimize the risk of large losses, unless clearly prudent not to do so

4. What Is the Duty to Follow Plan Documents?

• Act in accordance with plan documents, as long as those documents comply with ERISA
• A fiduciary cannot follow plan provisions that violate ERISA itself

What Happens When a Fiduciary Breaches a Duty?

A fiduciary who breaches any of these duties is personally liable. ERISA imposes two separate remedies, and both apply together:

• A court may also order removal of the fiduciary, plus any other equitable relief it considers appropriate
• A fiduciary is not liable for a breach committed before they became a fiduciary, or after they stopped being one

Exam Tip: Gotchas

• The two remedies are cumulative, not alternative, and neither is capped by the other. A fiduciary whose breach cost the plan $200,000 and personally earned them $50,000 owes the plan $250,000. The exam likes to offer "the greater of the two" and "the loss only" as distractors.
• Personal liability means personal. The obligation runs against the fiduciary's own assets, not just the plan's insurance or the employer's balance sheet.

How Do 3(21) and 3(38) Fiduciary Roles Differ?

• A 3(38) investment manager must be a registered investment adviser, bank, or insurance company, and must acknowledge in writing that it is a fiduciary with respect to the plan
• Hiring a 3(38) manager transfers investment fiduciary liability from the plan sponsor to the manager (for those delegated decisions)

What Is the Participant-Directed Plan Safe Harbor?

ERISA provides a safe harbor for participant-directed plans that relieves plan fiduciaries from liability for losses resulting from participants' own investment decisions. It applies only when participants exercise independent control over their account assets.

Participant-directed safe harbor requirements:

• Offer at least 3 diversified investment alternatives with materially different risk/return characteristics
• Allow transfers among options at least once per quarter (every 3 months)
• Provide sufficient information for participants to make informed decisions (fund descriptions, fees, performance)
• Notify participants that the plan intends to follow the participant-directed safe harbor and that fiduciaries may be relieved of liability

Exam Tip: Gotchas

• Even under the participant-directed safe harbor, fiduciaries are NOT relieved of the duty to prudently select and monitor the investment options offered. The safe harbor only protects against losses from the participant's choice among those options.

What Is a Qualified Default Investment Alternative (QDIA)?

Under ERISA's QDIA safe harbor, a Qualified Default Investment Alternative (QDIA) is the default investment for participants who do not make an active election. Authorized by the Pension Protection Act of 2006 (PPA) to encourage automatic enrollment, plan fiduciaries receive safe harbor protection for defaulting contributions into a QDIA.

What Are the Four Types of QDIAs?

What Conditions Must a QDIA Meet for Safe Harbor Protection?

All six of the following conditions must be met:

• Assets are invested in a qualified default investment alternative
• Participant must have had the opportunity to direct investments but failed to do so
• Written notice must be provided at least 30 days before the participant becomes eligible to participate, or at least 30 days before the first QDIA investment, and annually thereafter
• The fiduciary must pass through the plan's investment materials (prospectuses, fee and performance information) covering the QDIA
• Participant must be able to transfer out of the QDIA at least quarterly, with no restrictions, fees, or expenses on transfers during the first 90 days of investment in the QDIA
• The plan must offer a broad range of investment alternatives

Exam Tip: Gotchas

• A money market fund or similar principal-preservation product qualifies as a QDIA only for the first 120 days of participation. After that, contributions must go into one of the other three QDIA types (target-date, balanced, or managed account). A stable value fund is a separate, older QDIA category that closed to new money in December 2007; it does not carry the 120-day clock.
• The 90-day fee protection is a window, not a permanent exemption. After 90 days, a participant defaulted into a QDIA simply cannot be charged fees that would not apply to someone who chose that investment deliberately; it becomes an equal-treatment rule, not a no-fee rule.

What Should You Check on Exam Day?

• A named fiduciary is appointed on paper in the plan document; a functional fiduciary is defined by conduct, regardless of what any document says.
• The functional definition has three separate triggers, and any one is enough: discretion over plan management or assets, paid investment advice, and discretionary responsibility in plan administration.
• Applying rules someone else already set is a ministerial function and creates no fiduciary status. Interpreting an ambiguous provision to decide a disputed claim is discretion, and it does.
• Paid investment advice creates fiduciary status only when it is regular, individualized, and given under a mutual understanding that the plan will treat it as a primary basis for its investment decisions, not from any single paid recommendation. The compensation may be indirect, such as revenue sharing paid by a fund provider.
• The four core duties are loyalty (exclusive benefit rule), prudence (prudent expert rule), diversification, and following plan documents that comply with ERISA.
• A breaching fiduciary is personally liable both to restore the plan's losses and to give up any profit made from plan assets. The two run together, so a $200,000 loss plus a $50,000 personal gain costs the fiduciary $250,000.
• A 3(38) investment manager must be a qualifying entity that has acknowledged fiduciary status in writing, and assumes fiduciary liability for delegated decisions; a 3(21) investment adviser shares liability with the plan sponsor.
• The participant-directed safe harbor protects fiduciaries only from losses caused by a participant's own investment choices, never from the duty to prudently select and monitor the options offered.
• A money market fund or similar principal-preservation product qualifies as a QDIA only for the first 120 days; QDIA notice is due at least 30 days before plan eligibility or the first investment (whichever applies) and annually after.
• A rollover IRA loses ERISA's federal creditor shield, but amounts rolled over from an employer plan stay fully exempt from the federal bankruptcy IRA cap.